SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

 

 

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   ý   No   o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

Indicate by check mark whether the registrant is an accelerated filer ( as defined in Exchange Act Rule 12b-2)  Yes  o    No ý

 

 

As of  June 28, 2002, there were outstanding 221,500 shares of the Registrant’s common stock (“Common Stock”) and 6,000 shares of the Registrant’s class A common stock (“Class A Common Stock”). As of June 28, 2002, no shares of the Common Stock or the Class A Common Stock were held by non-affiliates of the Registrant.

 

By virtue of Section 15(d) of the Securities Act of 1934, the Registrant is not required to file this Annual Report pursuant thereto, but has filed all reports as if required to do so during the prior 12 months.

 

 

HENRY COMPANY

ANNUAL REPORT ON FORM 10-K

FOR FISCAL YEAR ENDED DECEMBER 31, 2002

 

TABLE OF CONTENTS

 

Item No.
		PART I
1.		Business
2.		Properties
3.		Legal Proceedings
4.		Submission of Matters to a Vote of Security Holders
		PART II
5.		Market for the Registrant’s Common Equity and Related Shareholder Matters
6.		Selected Financial Data
7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A.		Quantitative and Qualitative Disclosures About Market Risk
8.		Financial Statements and Supplementary Data
9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
		PART III
10.		Directors and Executive Officers of the Registrant
11.		Executive Compensation
12.		Security Ownership of Certain Beneficial Owners and Management
13.		Certain Relationships and Related Transactions
14.		Controls and Procedures
		PART IV
15.		Exhibits, Financial Statements, Schedules and Reports on Form 8-K

 

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FORWARD LOOKING STATEMENTS

 

Any statements set forth herein that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by the Private Securities Litigation Reform Act of 1995.  These “forward-looking statements” are found at various places throughout this document and include without limitation those relating to the Henry Company’s (“Henry” or the “Company”) future business prospects, revenues, working capital, liquidity, capital needs and income.  In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will”, “expect,” “should,” “intend,” “estimate,” “anticipate,” “believe,” or “continue” or similar terminology.  Undue reliance should not be placed on these forward-looking statements and Henry cautions that such statements are necessarily estimates reflecting the current views of the Company’s senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements.  Such statements should, therefore, be considered in light of various important factors set forth in this report and others set forth from time to time in the Company’s reports filed with the Securities and Exchange Commission (the “SEC”).

 

There are many factors that could cause actual results to differ materially from those contained in the forward-looking statements.  These factors include:  (i) the ability to generate sufficient cash flow to service the Company’s debt service and working capital needs; (ii) the ability to achieve future cost savings and revenue growth; (iii) fluctuations in raw material costs; (iv) the absence of inclement weather, (v) adverse changes in the Company’s relationship with its most significant customers, including Home Depot, (vi) the impact of product liability and asbestos litigation, disruptions in asbestos supply (and possible reduction in demand for asbestos-bearing products); (vii) competitive factors; and (viii) changes in general economic conditions or the hostilities in the Middle East.  Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statement will be contained from time to time in documents filed by the Henry Company with the SEC, including, but not limited to the Company’s reports on Forms 10-Q.  Some of these factors are described under the section entitled “Business/Risk Factors” in the Company’s Annual Report on this Form 10-K for the period ending December 31, 2002.

 

The Company, through its senior management or persons acting on its behalf, may from time to time make oral or written “forward-looking statements” about the matters described herein or other matters concerning the Company and such statements are subject to the qualifications set forth herein.  The Company disclaims any intent or obligation to update publicly or revise “forward-looking statements.”

 

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PART I

 

ITEM 1.        BUSINESS

 

General

 

The Company is a specialty chemicals company focusing primarily on products for roofing, sealing and paving applications. The Company develops, manufactures and markets several separate but related product lines including roof and driveway coatings and paving products, industrial emulsions, air barriers, polyurethane foam for roofing and commercial uses, sealants for construction and marine uses and specialty products.

 

Beginning in 1988, the Company’s management focused on expanding the Henry brand from its Southern California base initially through the acquisition of regional roof coatings manufacturers and distributors in contiguous regions of the Southwest, the Northwest, Northern California and the Rocky Mountain region. In 1998, the Company became a national organization by acquiring Monsey Bakor, which has served the U.S. and Canadian markets for over 50 years as a leading manufacturer and distributor of a broad spectrum of building products for residential and commercial use with a product line consisting of roof coatings, adhesives and membranes, roofing and air barrier systems as well as specialized industrial emulsions. In 1999, the Company acquired Grundy Industries, a leading roof coatings manufacturer focused on servicing the professional trade in the Midwest and Rocky Mountain region of the U.S.

 

Divisions

 

The Company’s two major divisions are the Henry Building Products Division and the Resin Technology Division.

 

Henry Building Products Division

 

The Henry Building Products Division, which represents the majority of the Company’s 2002 net sales, develops, manufactures and markets coatings, sealants and membranes for construction, industrial, building materials and other specialty applications. The Company also manufactures wax–based emulsions for the gypsum industry.

 

Products

 

Roofing products represent the majority of the Building Products Division’s total revenues. Henry’s roofing products are designed to address the problems of water invasion, wind erosion and ultraviolet damage. Henry offers a full line of liquid roof coatings and adhesives including both solvent and water-based products. In addition to roof coatings and mastics, Henry manufactures high-quality styrene-butadiene-styrene (SBS) modified bitumen roofing membrane products designed to be used in roofing systems that can meet the challenge of the elements encountered throughout North America.

 

The Company offers a full line of reflective coatings designed to improve roof aesthetics and aid in the conservation of energy through their reflective qualities. Henry’s reflective coatings product line includes both white acrylic and solvent-based coatings and high-quality aluminum products and the accessories needed to protect roofs for years.

 

Henry’s industrial emulsions are used as coating, sizing, strengthening and moisture-proofing additives by manufacturers of fiber products such as gypsum wallboard, insulation board, gaskets, paper board, and glass fibers. The Company’s primary emulsion product, wax-based industrial emulsions, are specifically used by manufacturers of gypsum wallboards. Sales of industrial emulsions have increased in recent years partially due to increased environmental restrictions on volatile organic compound emissions, which have created a demand for emulsion–based products over solvent-based products. The Company’s wax-based emulsions are manufactured with proprietary and patented processes that management believes contributes to higher margins relative to those of competitors.

 

Driveway maintenance and paving products manufactured by Henry are used for the asphalt highway market and the preventative maintenance of asphalt parking lots and driveways. Henry Company produces polymerized asphalt, an asphalt binder that is a key ingredient of paving asphalts.

 

The Company’s air barrier systems are designed to reduce air flows through exterior walls of buildings. The movement of air into a building (infiltration) and out of a building (exfiltration) is caused by pressure differences produced by wind,

 

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chimney effect and pressurization. If air flows through a building and exfiltrates, it can deposit moisture on the cold masonry cladding, causing brick or stone to undergo major changes due to moisture absorption. This dampness can cause dimensional changes and accelerate the deterioration process. Moisture–laden air from a humidified building can also develop into ice under freezing conditions, causing displacement of the exterior masonry cladding, corrosion, and lower energy efficiency. The advantage of the Company’s prefabricated modified bitumen sheet is that it provides a flexible air barrier membrane capable of bridging construction gaps and absorbing deflection.

 

The Company’s line of air barriers can be installed into existing buildings on either internal or external walls or used in the construction of new buildings. In 1986, Canada required air barriers in all buildings as an amendment to the National Building Code. In the United States, however, there is no national standard and the air barrier market remains in its infancy.

 

The Company’s specialty products include protective coatings for a variety of industrial and commercial applications, such as specialty asphalt coatings to protect wood, metal, mortar or thermal insulation. The Company manufactures undercoatings for mobile homes, as well as both solvent and water-based rust-proofing products for the automobile industry.

 

The Company’s sealant line has three distinct product categories: sealants for construction applications, hatch cover sealants for ocean freighters, and preformed adhesive waterstops for expansion joint applications on construction projects. Products include preformed plastic gaskets for precast concrete structures, which provides watertight sealing for joints such as those on underground concrete drainage and manhole structures. These products are also used for sealing hatch covers on ships to prevent water damage to cargoes that can occur in heavy seas. There is also a preformed plastic adhesive waterstop which is used as a construction joint sealant in poured-in-place concrete structures. Henry Company believes this product allows for an easier, more reliable and more efficient sealing method than the traditional PVC-type waterstop.

 

Manufacturing

 

For purposes of organizing its manufacturing process, the Company uses seven related product groups. The product groups are: cold applied liquid coatings, cements and adhesives; asphalt, coal tar and wax emulsions; acrylic-based roof and insulation coatings; hot melt rubberized asphalt roofing and waterproofing products; SBS modified bitumen membranes, air barrier and waterproofing membranes; specialty adhesives; and specialty preformed asphaltic tapes.

 

The key materials used in the production of roofing and pavement products are asphalt, mineral spirits, various fibers, resins, and polyester and glass matting. For the production of industrial emulsions, the primary material is refined wax. These raw materials are generally available on a regional basis and supply disruptions are very rare. The Company maintains multiple sourcing arrangements for all of its key raw materials helping to mitigate price increases.  In addition to raw materials, packaging supplies represent a meaningful portion of production cost.

 

The Company, like a number of its competitors, uses fibers such as chrysotile asbestos in its production process. Management believes that its use of chrysotile asbestos is in accordance with regulations of the Occupational Safety and Health Administration (“OSHA”). OSHA requires that chrysotile asbestos fibers not be exposed to an open-air environment. In the Company’s production process, the cellulose or chrysotile asbestos fiber is pumped through a negative pressure fluffer that separates the fibers for optimal dispersion in the product mixture. The fibers are then mixed into and fully encapsulated by the asphalt. Once encapsulated the fibers are “locked” into the asphalt cutback and cannot be physically separated from the product. OSHA and other regulatory bodies have determined that encapsulation renders the chrysotile asbestos harmless. The Environmental Protection Agency (“EPA”) does not regulate or enforce any special procedures for the application of chrysotile asbestos–containing roof coatings or sealants.

 

Sales, Marketing and Distribution

 

Due to the many products manufactured by the Henry Building Products Division, the Company markets its products by focusing on four primary sales channels. These channels are: Retail; Industrial, Commercial and Institutional (“ICI”); Specialty Products; and International.

 

The Retail channel consists of national home center chains, retail building material suppliers, hardware distributors, paint and sundry distributors, farm and hardware cooperatives, and mass merchandisers. To reach customers, the Company employs a trained sales organization and has an in-house Creative Services Department that produces customized brochures and promotional materials and coordinates national and regional advertising programs.

 

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The ICI channel consists of national and regional roofing distributors that sell to contractors throughout North America.  Henry maintains a technical selling staff engaged in both sales and training to help ensure that the Company’s products are applied properly.

 

The Specialty Products channel consists of the gypsum wallboard industry, which buys wax emulsions, and major roofing companies, which are the primary market for asphalt emulsions for use as a sizing agent in insulation board.  The Company markets a broad array of products using a technical sales force trained to help customers in the use of the various products.

 

The International channel consists of international retailers and distributors.  Henry products are marketed to the international sales channel with special focus on the Company’s basic product line of roof coatings and cements and industrial emulsions.

 

In January 2002, the Company entered into a three-year agreement with Home Depot that significantly expands the Company’s relationship with Home Depot.  The agreement contains performance targets, which, if not achieved, could trigger a payment from the Company to Home Depot in 2005.  In the first quarter of 2002, the Company’s relationship with Lowes, its second largest customer, was terminated.  During 2002, the incremental revenue resulting from the Home Depot agreement exceeded the revenue lost as a result of the loss of Lowes as a customer.

 

Roofing Systems

 

Henry Company has developed a roofing systems segment for one-stop commercial roofing or re-roofing or roofing maintenance with warranty protection. The Company’s personnel work directly with architects, building owners and contractors to develop custom specifications utilizing Henry products for the design, construction and maintenance of commercial roofs. An important component of the Company’s roof systems program’s success is that building owners are assured that Henry Company will stand behind the roof from beginning to end.  A Henry Company sales consultant will write a custom specification for the roof and the roofing system will be applied by a Henry Company-approved contractor generally using Henry Company products. A Henry Company technical inspector will inspect the roof application during installation and regular follow-up inspections and in some instances maintenance will be performed throughout the life of the warranty. Henry Company offers 5 to 20-year warranties on its re-roofing systems and 5-year warranties on its maintenance systems calculated on a fee per square-foot basis. Since its inception, expenses for warranty claims experience has been very low. In part, this is due to Henry Company’s continuing inspection program. Management believes that the roofing systems business represents a significant growth opportunity.

 

Resin Technology Division

 

The Resin Technology Company (“RTC”), founded as an independent company in 1982 and now a division of the Company, produces polyurethane foam products for roofing and other industrial applications. RTC also sells coating products manufactured for it by third parties for application on foam. The acquisition of RTC in 1988 has enabled the Company to offer a broader range of roofing products to meet the needs of the commercial and residential roofing markets.

 

Products

 

RTC’s primary product categories are polyurethane foam and coatings. Polyurethane foam has two liquid components, resin and hardener, which are mixed together in a spray unit during application. A chemical reaction causes the liquid to expand many times in thickness creating a rigid layer of closed-cell foam. In roofing applications, this foam is strong enough to be walked on minutes after the application. The result is a seamless barrier against water penetration that is durable and easy to maintain. In roofing applications, an elastomeric coating must be applied as protection against the sun’s ultraviolet radiation. RTC sells acrylic, urethane, silicone and polyurea coatings.

 

RTC’s products offer users several advantages, including a seamless barrier that minimizes the likelihood of leaks and provides superior insulation characteristics that can reduce energy costs. It is relatively light in weight and is therefore particularly adaptable to large arenas or other structures that may benefit from a lighter weight roof. Furthermore, it can be applied directly over an existing roof, potentially avoiding the costly “tear-offs” that may be required with other roofing systems.

 

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RTC’s products are also used in a number of original equipment manufacturer applications. The insulation and weight characteristics of polyurethane foam make it an integral part of the thermal panel, spa and packaging industries, among others.

 

Manufacturing

 

RTC manufactures all of its polyurethane foam products in its Ontario, California manufacturing facility. Its polyurethane resin system is made up of two components: a hardening agent that is purchased by the Company and resin that is manufactured in the Ontario facility. Raw materials are automatically pumped from one or more of the 11 raw material storage tanks within the facility, blended and then poured into 55-gallon drums, tote capsules or bulk tanker trucks. The production process is highly automated. The bulk of RTC’s coatings products for polyurethane foam applications are produced by a third-party manufacturer also located in Ontario. The Company believes that it derives its success in the polyurethane foam market from its superior understanding of technology and the Company has secured a number of original equipment manufacturer accounts because of its ability to produce products for a customer’s very specific technical requirements.

 

Sales, Marketing and Distribution

 

The Resin Technology Company sells primarily to roofing contractors and original equipment manufacturers in the western United States. RTC’s roofing products are sold directly to pre-qualified contractors experienced in applying and spraying polyurethane foam onto roofs. Sales to original equipment manufacturers include those to spa equipment manufacturers, and management believes the Company is the leading supplier to this market. RTC also supplies manufacturers in many other industries including those producing freezer panels, thermal food transportation equipment, boat floatation and packaging products. RTC’s remaining sales are made to several distributors, particularly in the Northwest and upper Midwest.

 

RTC supports its sales efforts with a sales staff organized according to market segment and regional location. Henry Company believes that RTC’s marketing advantages are based on a commitment to technical development and customer support and also believes that RTC has captured a number of original equipment manufacturer accounts from its competitors by efficiently responding to the customer’s technical requirements. In both the roofing and original equipment manufacturer segments Henry Company provides just-in-time delivery capability which is essential in time and labor – sensitive roofing applications.

 

Employees

 

As of December 31, 2002, Henry Company employed approximately 560 persons, the majority of whom were involved in production and distribution, with the balance engaged in administration, sales and clerical work. Of these employees, approximately 415 were employed in the United States and 145 in Canada. Approximately 25 employees in Kimberton, Pennsylvania, 38 employees located in Huntington Park, California, 8 employees in Rock Hill, South Carolina, 28 employees in Lachine (formerly Ville St. Pierre), Quebec and 2 employees in Mirabel, Quebec are unionized and covered by collective bargaining agreements. These collective bargaining agreements expire on March 31, 2003, June 30, 2003, February 1, 2004, June 30, 2005 and June 30, 2005, respectively. The Company believes that its relationship with its employees is good. The Company has not experienced a work stoppage at any of its facilities in over 20 years.

 

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Risk Factors

 

Substantial Leverage

 

The Company has consolidated indebtedness that is substantial in relation to the book value of its shareholders’ equity. As of December 31, 2002, Henry Company had approximately $87.6 million of debt (the sum of long-term debt, including current maturities of long-term debt, notes payable, borrowings under the lines of credit, and capitalized lease obligations) and a shareholders’ deficit of approximately $30.9 million.

 

The Company’s significant level of borrowings has several important consequences for the Company including but not limited to the following: (i) a substantial portion of the Company’s cash flow from operations must be dedicated to debt service and is not available for other purposes; (ii) the Company’s ability to obtain additional financing in the future for working capital, acquisitions or capital expenditures has been significantly impaired and (iii) the Company’s substantial leverage may make it more vulnerable to economic downturns and may limit its ability to withstand competitive pressures or to take advantage of business opportunities.

 

The Company’s ability to make cash payments to satisfy its debt obligations will depend on its future operating performance, which will be affected by financial, business, competitive, general economic and other factors, many of which are beyond the Company’s control. Based upon current levels of operations and anticipated cost savings and future growth, the Company believes that its expected cash flows from operations, together with available borrowings under its credit facility will be adequate to meet its anticipated requirements for working capital, scheduled principal and interest payments, lease payments and capital expenditures for the next twelve months. See “Management’s Discussion and Analysis of Financial Condition, Results of Operations, and Liquidity and Capital Resources”.

 

Ability to Achieve Anticipated Cost Savings or Revenue Growth

 

During 2001, the Company instituted a number of initiatives to improve operating results including, but not limited to (i) a change in executive level management, appointing Mr. Baribault as President and Chief Operating Officer (ii) the implementation of a restructuring plan in which the Company closed a manufacturing plant, reorganized or eliminated certain administrative functions, and restructured its selling organization. Many of the benefits of these initiatives were realized in 2002. Although financial results improved from 2001 to 2002 there can be no assurance that any of these actions will result in further improvement in the Company’s future financial and operating results. Any statements concerning potential cost savings and revenue growth contained in this annual report are forward-looking statements that are based on estimates and assumptions made by the Company’s management.

 

 

Cost Fluctuations and Supply of Certain Raw Materials

 

The Company utilizes a number of raw materials in its manufacturing processes, some of which have historically fluctuated in price at particular times. These price fluctuations have been based on such factors as the capacity of the raw material supply chain, demand in the market, weather, general economic factors and the availability of alternative raw materials. Raw materials utilized by the Company that have historically experienced some price fluctuation include asphalt, aluminum paste, rubber and certain diisocyanates, among others. For example, asphalt, which is a byproduct of crude oil refining, has fluctuated in price with changes in worldwide crude oil prices and capacity and with changes in the supply and demand in the oil, gasoline and fossil fuel markets. Significant increases in asphalt prices or in the prices of other raw materials, if not offset by product price increases, could have a material adverse impact on the profits of the Company.  There can be no assurance that the Company will be able to pass any future cost increases through to its customers in the form of price increases.

 

In addition, shortages of some of these same raw materials can and may force the Company to find alternative replacements which most probably will be more costly. In particular, there are only two mines in North America that produce asbestos fibers that are used in the Company’s products. Due to a protracted work stoppage at one of the mines and a cessation of operations at the other, the asbestos used in the Company’s products became temporarily unavailable in the fourth quarter of 2002.  By the beginning of 2003, this raw material was once again available, although there is no certainty that this raw material will be readily available throughout 2003 and further into the future.

 

Despite this disruption in the supply of asbestos, the Company was able to meet its commitments to customers because it has equivalent non-asbestos formulations which were readily substituted for the products containing asbestos.

 

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Accordingly, the Company believes that its competitive position did not suffer, although the Company was unable to entirely pass on the increased cost of the raw material change during this period.

 

Currently the Company’s costs for petroleum related raw materials such as asphalt and mineral spirits are higher than they were at the comparable period one year ago, largely as a result of the increased price of oil.  With the current conflict in the Middle East, it is possible that the price of oil could rise significantly from current levels, as has occurred in prior outbreaks of war in this region.  If this occurred, the costs of asphalt and mineral spirits would most probably increase as well.  The Company would endeavor to pass these increased costs on to its customers but it is probable that there would be at least a short term negative cost impact to the Company. Even further, there is also the possibility that there could be a lack of supply of certain petroleum based raw materials as a result of the outbreak of war. If this is the case, there is no certainty that the Company would be able to obtain adequate raw material replacements to produce many of its products

 

Impact of Weather

 

Because many of the Company’s products are designed to patch or fix damaged roofs, the Company’s revenues are directly affected by weather conditions. Sales of roofing products have historically tended to increase in areas that have experienced severe weather. The results of severe weather or the anticipation of severe weather may motivate property owners to undertake required roof maintenance or to replace an old or worn roof. The absence of inclement weather in some or all of the Company’s markets could have an adverse impact on the Company’s business, financial condition, results of operations or cash flows.

 

Dependence on Key Customer

 

The Company is substantially dependent on Home Depot, the Company’s largest customer.  Home Depot represented approximately 11.4% of gross sales in fiscal year 2000, 13.3% of gross sales in fiscal year 2001, and 25.9% of gross sales in fiscal year 2002, and also accounted for approximately 23.3% and 40.0% of accounts receivable at December 31, 2001 and 2002, respectively. In January 2002, the Company entered into a three-year agreement with Home Depot that significantly expanded the Company’s relationship with Home Depot.  The agreement contains performance targets, which, if not achieved, could trigger a payment from the Company to Home Depot in 2005.  In the first quarter of 2002, the Company’s relationship with Lowes, its second largest customer, was terminated.  During fiscal year 2002, the incremental revenue resulting from the Home Depot agreement exceeded the revenue lost as a result of the loss of Lowes as a customer.  Any deterioration of the Company’s relationship with Home Depot, or any failure of Home Depot to purchase and pay for product shipped by the Company to Home Depot could have a material adverse affect on the Company.

 

Product Liability and Asbestos Litigation

 

The Company’s business entails an inherent risk of product liability claims, including a particular risk with respect to chrysotile asbestos-containing products that the Company manufactures. Although some roofing products manufacturers have switched to an exclusively non-asbestos line, some of the leading firms in the industry continue to use chrysotile asbestos in at least some of their products. The Company believes that its use of chrysotile asbestos fibers, which are encapsulated by asphalt in the manufacturing process, is in accordance with applicable laws, and that, consistent with Federal regulatory findings, its products are not hazardous. However, the Company has been named as a defendant in suits alleging certain asbestos-related injuries. Although the Company has not incurred any expense in judgment or settlement of any asbestos–related injury claim to date, there can be no assurance that any such claim will not in the future result in a material adverse judgment against, or settlement by, the Company. Other than these asbestos-related claims, no material product liability claims are currently pending against Henry Company. However, there can be no assurance that such claims will not arise in the future. The costs of defending the pending asbestos-related suits are currently funded by a joint defense arrangement among the Company’s insurance carriers and the Company believes such insurance coverage is adequate. However, Henry Company is not covered by insurance for asbestos-related claims for injuries that are alleged to have arisen after December 1, 1985.

 

The Company maintains product liability insurance for non-asbestos claims.  However, there can be no assurance that the product liability coverage maintained by the Company will be adequate to cover product liability claims or that the applicable insurer will be financially solvent at the time of any required payment. In addition, there can be no assurance that the Company will be able to maintain its product liability coverage on current or otherwise acceptable terms.

 

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A product liability or asbestos-related claim that results in a judgment or settlement in excess of the Company’s insurance coverage, or a material judgment or settlement for an asbestos-related claim for injuries alleged to have arisen after 1985, could have a material adverse effect on the Company.   With respect to the asbestos related cases filed against the Company, the Company knows of none that is either not covered by liability insurance or is claiming exposure after December 1, 1985, although in some cases, the claimed date of exposure is unknown.

 

Reliance on Key Personnel

 

The Company’s future success will depend to a significant extent on its executive officers and other key management personnel. Although the Company has employment agreements with three of its key executives, there can be no assurance that the Company will be able to retain its executive officers and key personnel or attract additional qualified management in the future.

 

Competition

 

The roofing products and roofing systems industries are highly competitive in most product categories and geographic regions. Competition is largely based on quality, service, price and distribution capabilities. The Company competes for retail and wholesale business with both large national manufacturers and smaller regional producers. In certain circumstances, due primarily to factors such as freight rates and customer preference for local brands, manufacturers with better access to certain geographic markets may have a competitive advantage in such markets. In addition, many of the Company’s competitors within the roofing products industry have greater financial, marketing, distribution, management and other resources than the Company, and as the industry consolidates, the Company’s competitors may further enhance their competitive advantages.

 

The Company also believes that excess capacity in the roofing products and roofing systems industry, especially during slow periods for the industry, could result in downward pricing pressure and intensified competition.   Additionally, it appears that the Company is facing increased competition in the wax emulsion segment of its business.  Given these factors, there can be no assurance that the Company will be able to continue to compete successfully against existing or new competitors, and the failure to do so would have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

 

Environmental Matters

 

The past and present business operations of the Company and the past and present ownership and operation of real property by the Company are subject to extensive and changing federal, state, local and foreign environmental laws and regulations pertaining to the discharge of materials into the environment, the handling, storage, treatment and disposal of wastes (including solid and hazardous wastes), the remediation of releases of toxic or hazardous materials or otherwise relating to health, safety and protection of the environment (“Environmental Laws”). As such, the nature of the Company’s operations as well as previous operations by others at real property owned, leased or used by the Company, expose the Company to the risk of claims under Environmental Laws, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. Based on its experience to date, the Company does not expect such claims or the costs of compliance with the scope or enforcement of Environmental Laws to have a material impact on its earnings or competitive position. The Company believes that it is in substantial compliance with applicable Environmental Laws. No assurance can be given, however, that the discovery of presently unknown environmental conditions, changes in the scope or enforcement of Environmental Laws or their interpretation, or other unanticipated events will not give rise to expenditures or liabilities that may have a material adverse effect on the Company’s business, financial condition or results of operations.

 

The Company, through its acquisition of Monsey Bakor, has been named as a potentially responsible party in litigation concerning contamination at a former waste–oil recycling facility used by it in Douglassville, Pennsylvania and at an EPA superfund remediation site in Rock Hill, South Carolina. The Company, also through its acquisition of Monsey Bakor, is also a party to a consent decree issued by the federal Environmental Protection Agency relating to remediation of contamination at its Kimberton, Pennsylvania facility. It is sharing remediation costs with a former owner of the facility that is also a party to the consent decree. Based on currently available information, the Company believes that these matters will not have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

 

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Governmental Regulation and Permits

 

The Company is subject to regulation under various federal, state and local laws, including laws regulating its manufacturing operations and laws relating to employee health and safety. Permits are required for operation of the Company’s business, and such permits are subject to renewal, modification and, in certain circumstances, revocation by governmental authorities. The loss of certain of such permits could have a material adverse effect on the Company’s business, financial condition or results of operations. The Company expects to incur ongoing capital and operating costs and administrative expenses to maintain compliance with its permits and with applicable laws and regulations. The Company cannot predict the legislation or regulations that may be enacted in the future or how existing or future laws or regulations will be administered or interpreted. Compliance with new laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies or stricter interpretation of existing laws, may require additional expenditures by the Company, some or all of which may be material.

 

ITEM 2.        PROPERTIES

The Company’s operations are conducted at the owned or leased facilities described below:

 

Locations		Facility Square Footage		Owned/Leased
United States
Huntington Park, California		95,478		Leased
Sacramento (Elk Grove), California		18,871		Leased
Portland, Oregon		55,735		Leased
Seattle (Auburn), Washington		12,500		Leased
Ontario, California		13,330		Leased
Houston, Texas		44,000		Owned
Kimberton, Pennsylvania		147,400		Owned
Indianapolis, Indiana		63,000		Owned
Waterford, New York (closed)		120,000		Owned
Rock Hill, South Carolina		40,000		Owned
Garland, Texas		76,500		Owned
Bartow, Florida		34,000		Owned
Kingman, Arizona		39,275		Owned
Denver, Colorado		13,112		Owned
Canada
Petrolia, Ontario		58,500		Owned
Mirabel, Quebec		6,100		Owned
Lachine (Montreal), Quebec		44,000		Owned

 

The Company also leases a small administration facility in Mississauga, Ontario. In addition, the Company owns a small facility in Troy, New York that it leases to a third party. The Company believes that its facilities are in good operating condition and are adequate to meet anticipated future requirements.

 

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ITEM 3.  LEGAL PROCEEDINGS

 

In the ordinary course of business, the Company is periodically named as a defendant in a variety of product liability lawsuits including “slip and fall” claims relating to pavement sealants and claims for alleged product failure. The Company does not believe these cases will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

 

As of December 31, 2002, the Company was a party to approximately 70 active state court cases alleging certain asbestos-related injuries. There were thirty-four new cases filed in 2002, eleven filed in 2001, five in 2000, six in 1999, seven in 1998 and two in 1997. The Company believes that its use of chrysotile asbestos fibers, which are encapsulated by asphalt in the manufacturing process, is in accordance with applicable laws, and that consistent with Federal regulatory filings, its products are not hazardous. Although the Company has not incurred any expense in judgment or settlement of any asbestos-related  injury claim to date, there can be no assurance that any such claim will not in the future result in a material adverse judgment against, or settlement by, the Company.  The Company’s insurance carriers currently fund the legal costs of these suits and the Company believes that such insurance coverage is adequate. However, Henry Company is not covered by insurance for asbestos-related claims for injuries that are alleged to have arisen after December 1, 1985.   With respect to the cases filed, the Company knows of none that is either not covered by liability insurance or is claiming exposure after December 1, 1985, although in a few cases, the claimed date of exposure is unknown.

 

The Company does not believe that the outcome of these suits and legal proceedings will have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

 

Environmental Matters

 

The Company is subject to extensive and changing environmental laws and regulations with which it believes it is in substantial compliance. However, there can be no assurance that the discovery of presently unknown environmental conditions or changes in the scope, interpretation or enforcement of environmental laws and regulations will not have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows.

 

The Company’s Kimberton facility was formerly occupied by a pharmaceutical manufacturer whose operations resulted in groundwater contamination identified on the site and surrounding area. The contaminant of concern was trichloroethylene which required various remedial activities, including the provision of alternate water supplies to users in the surrounding area and a groundwater treatment program. Remedial work is being completed under a consent decree the EPA negotiated in 1990 with the pharmaceutical manufacturer and the Company and a confidential cost sharing agreement between these two companies. The Company’s costs under the consent decree in 2000, 2001 and 2002 were approximately $73,000, $60,000 and $64,000, respectively, and are not expected to be significantly different during 2003 and 2004. The Company has a liability recorded for the entire expected costs of the remedial work over the remaining term of the consent decree and cost-sharing agreement. Costs paid under the consent decree and cost-sharing agreement of $64,000 in 2002 reduced the liability to $3.2 million at December 31, 2002.

 

The Company is currently closing certain of its underground storage tanks. The Company estimates that the capital expenditures required to comply with various regulatory programs in 2003 will not have a material adverse effect on the Company’s earnings, cash flows or competitive position. Such estimates, however, are based on factors and assumptions that are subject to change, including potential modifications of regulatory requirements, detection of unanticipated environmental conditions or other currently unexpected circumstances.

 

ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of the Company’s shareholders during the fourth quarter of the fiscal year covered by this report.

 

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PART II

 

ITEM 5.        MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

 

There is no established public trading market for the Company’s common equity.

 

As of December 31, 2002, there were seven (7) beneficial holders of the Company’s Common Stock and one beneficial holder of the Company’s Class A Common Stock.

 

At the present time, the Company intends to retain all earnings for use in the operation and development of its business and does not expect to declare or pay any cash dividends in the foreseeable future. The Company’s current credit facility also prohibits the payment of any dividends. Any determination in the future to pay dividends will depend on the Company’s earnings, financial condition, capital requirements, level of indebtedness and other factors deemed relevant by the Company’s Board of Directors, including any contractual or statutory restrictions on the Company’s ability to pay dividends.

 

 

ITEM 6.        SELECTED FINANCIAL DATA

 

The following selected consolidated financial data should be read in conjunction with Henry Company’s consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this document. The consolidated statement of operations data for each of the years in the three-year period ended December 31, 2002, and the consolidated balance sheet data at December 31, 2001 and 2002, are derived from the consolidated financial statements of Henry Company which have been audited by PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere in this document. The consolidated statement of operations data for the years ended December 31, 1998 and 1999 and the consolidated balance sheet data at December 31, 1998, 1999, and 2000 are derived from audited financial statements of Henry Company not included in this Annual Report on Form 10-K.  Historical results are not necessarily indicative of the results to be expected in the future.

 

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		Year Ended December 31
		1998(7)			1999			2000			2001			2002
		(In thousands)
Consolidated Statement of Operations Data(1):
Net sales		$	148,512		$	175,712		$	191,513		$	191,848		$	200,806
Cost of sales		105,143			124,906			143,266			138,473			138,254
Gross profit		43,369			50,806			48,247			53,375			62,552
Operating expenses:
Selling, general and administrative		33,836			44,871			46,595			47,384			51,122
Restructuring charges(2)		—			—			735			569			—
Amortization of intangibles		1,629			2,928			2,550			2,525			742
Operating income (loss)		7,904			3,007			(1,633		)	2,897			10,688
Interest expense		6,567			9,194			9,889			10,060			9,696
Interest and other income, net		(243		)	(224		)	(260		)	(191		)	(107		)
Income (loss) before extraordinary item		1,580			(5,963		)	(11,262		)	(6,972		)	1,099
Extraordinary gain related to early extinguishments of debt(3)		—			(601		)	—			—			—
Income (loss) before provision (benefit) for taxes and change in accounting principle		1,580			(5,362		)	(11,262		)	(6,972		)	1,099
Provision (benefit) for income taxes(4)		509			304			(4,596		)	(1,634		)	(213		)
Income (loss) before cumulative effect of change in accounting principle		1,071			(5,666		)	(6,666		)	(5,338		)	1,312
Cumulative effect of change in accounting principle(5)		—			—			—			—			(19,686		)
Net income (loss)		$	1,071		$	(5,666	)	$	(6,666	)	$	(5,338	)	$	(18,374	)
Other Financial Data:
Capital expenditures		$	2,997		$	4,184		$	3,052		$	1,358		$	2,206
Depreciation and amortization (including amortization of intangibles)		4,894			7,171			7,591			7,315			5,225
EBITDA(6)		12,971			10,329			6,145			10,343			15,956
Cash flows provided by (used in):
Operating activities		9,981			(3,387		)	(10,114		)	6,507			6,294
Investing activities		(48,010		)	(6,783		)	(2,801		)	(1,326		)	(2,082		)
Financing activities		50,445			(1,374		)	13,354			(5,710		)	(3,684		)

 

		1998			1999			2000			2001			2002
Combined Balance Sheet Data(1):
Cash and cash equivalents		$	12,023		$	685		$	1,046		$	426		$	1,013
Working capital		32,380			23,862			20,797			20,518			26,586
Total assets		125,514			119,325			125,288			110,899			91,636
Long-term debt, including current maturities and borrowings on lines of credit		87,631			84,671			95,370			91,297			87,623
Total shareholders’ equity (deficit)		5,830			804			(6,365		)	(12,440		)	(30,851		)

 

(1)                                  For periods prior to April 22, 1998, the Company’s financial statements were prepared on a combined basis with Warner Development Company of Texas (“Warner Development”) as both entities were under common control with

 

14

 

identical shareholder ownership interests. On April 21, 1998, Warner Development was merged into Henry Company and the outstanding shares of Warner Development capital stock were cancelled.

 

(2)                                  The Company recorded a $735,127 and a $568,808 restructuring charge in 2000 and 2001 respectively, related to plant closings and the reorganization or elimination of certain administrative and selling functions. The charges represent severance and other personnel payments related to the streamlining of operations associated with the implementation of cost reduction initiatives noted above.

 

(3)                                  In 1999, the Company repurchased $3.6 million of the Senior Notes which were issued in conjunction with the acquisition of Monsey Bakor. The resulting gain is shown net of taxes.

 

(4)                                  Prior to April 1998, Henry Company was operated as a subchapter “S” Corporation under the Code. As a result, Henry Company did not incur federal and state income taxes (except with respect to certain states) and, accordingly, the provision for income taxes only includes the applicable state income tax. Federal and state income taxes (except with respect to certain states) on the income of Henry Company have been incurred and paid directly by the shareholders of Henry Company. It had been the policy of Henry Company to make periodic distributions to the shareholders in respect of such tax liabilities. During the year ended December 31,1998, Henry Company paid distributions of $1.2 million for the shareholders’ 1997 tax liabilities. On April 22, 1998, the Company converted to a “C” corporation under the Code and will subsequently pay all future tax obligations of the Company to the appropriate taxing authorities.

 

(5)                                  The Company recorded a $19.7 million charge for the year ended December 31, 2002, resulting from the impairment of goodwill associated with the Company’s adoption of SFAS No. 142 which changes the accounting for goodwill from an amortization method to an impairment-only approach.  SFAS No. 142 changed the method for assessing goodwill impairments from an undiscounted cash flow method prescribed by SFAS No. 121 to a fair market value approach. See Note 1 to the Consolidated Financial Statements.

 

(6)                                  EBITDA, as defined in the indenture relating to the Company’s outstanding 10% Senior Notes, represents net earnings before taking into consideration taxes on earnings, interest expense, depreciation and amortization, and non-recurring, non-cash charges, less any cash expended that funds a non-recurring, non-cash charge.  Also excluded are cash payments of prior accruals for environmental charge associated with the Monsey Products Company. While EBITDA should not be construed as a substitute for operating earnings, net earnings, or cash flows from operating activities in analyzing operating performance, financial position or cash flows, EBITDA has been included because it is commonly used by certain investors and analysts to analyze and compare companies on the basis of operating performance, leverage and liquidity. This data is relevant to an understanding of the economics of the Company’s business as it indicates cash flow available from operations (and/or trends in cash flow available from operations) to service debt and satisfy certain fixed obligations. A reconciliation of net income (loss) to EBITDA for the respective years and related interim periods is as follows:

 

		Years Ended December 31,
		1998			1999			2000			2001			2002
		(In thousands)
Net income (loss)		$	1,071		$	(5,666	)	$	(6,666	)	$	(5,338	)	$	(18,374	)
Provision (benefit) for income taxes		509			304			(4,596		)	(1,634		)	(213		)
Interest expense		6,567			9,194			9,889			10,060			9,696
Depreciation and amortization		4,894			7,171			7,591			7,315			5,225
Cumulative effect of change in accounting principle		—			—			—			—			19,686
Adjustment for cash payment of prior accrual for environmental charge		(70		)	(73		)	(73		)	(60		)	(64		)
Extraordinary gain on debt extinguishment		—			(601		)	—			—			—
EBITDA		$	12,971		$	10,329		$	6,145		$	10,343		$	15,956

 

(7)                                  On April 22, 1998, the Company acquired Monsey Bakor and its subsidiaries. The acquisition was accounted for using the purchase method of accounting and as such, the results of operations of Monsey Bakor since the acquisition date have been included in the consolidated financial statements of the Company.

 

15

 

 ITEM 7.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the Company’s consolidated results of operations and consolidated financial position should be read in conjunction with the Selected Financial Data and the Company’s Consolidated Financial Statements, including notes thereto, appearing elsewhere in this Annual Report.

 

GENERAL

 

The Company is a specialty chemicals company focusing primarily on products for roofing, sealing and paving applications. The Company develops, manufactures and markets several separate but related product lines including roof and driveway coatings and paving products, industrial emulsions, air barriers, polyurethane foam for roofing and commercial uses, sealants for construction and marine uses and specialty products. The Company has seventeen manufacturing and distribution facilities throughout North America. The Company’s business is seasonal and is dependent on weather trends that vary by geographic region.

 

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions for the reporting period and as of the financial statement date.  These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses.  Actual results could differ from those amounts.

 

Critical accounting policies are those that are important to the portrayal of the Company’s financial condition and results of operations, and which require management to make difficult, subjective and/or complex judgments.  Critical accounting policies cover accounting matters that are inherently uncertain because in many instances, the future resolution of such matters is unknown.  The Company believes that critical accounting policies include accounting for sales rebates and discounts, accounting for allowances for doubtful accounts, accounting for inventory, deferred income taxes, accounting for intangible and other long lived assets, and contingencies.

 

•                       Sales rebates and discounts are common practice in the industries in which the Company operates.  Volume, promotional, price, cash and other discounts and customer incentives are accounted for as a reduction to gross sales.  Rebates and discounts are estimated and recorded when sales of products are made.  These provisions for rebates and discounts are adjusted, if necessary, when additional information becomes available.

 

•                       Management is required to make judgments, based on historical experience and future expectations, as to the collectibility of accounts receivable.  The allowances for doubtful accounts and sales returns represent allowances for customer trade accounts receivable that are estimated to be partially or entirely uncollectible.  These allowances are used to reduce gross trade accounts receivable to their net realizable value.  The Company records these allowances based on estimates related to the following factors:  i) customer specific allowances; ii) amounts based upon an aging schedule and iii) an estimated amount, based on the Company’s historical experience, for collectibilility issues not yet identified.

 

•                       Inventories are stated at the lower of cost or market value and are categorized as raw materials or finished goods.  Inventory is periodically reviewed for damaged, obsolete, excess and slow-moving inventory and reserves are provided as necessary.  The Company has the ability to rework slow-moving inventory into more saleable product.

 

•                       The Company recognizes deferred taxes in accordance with the liability method of accounting for income taxes. Under this method, deferred taxes are determined based on the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.  Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.  In assessing the need for a valuation allowance, management considers estimates of future taxable income and ongoing prudent and feasible tax planning strategies.  The provision for income taxes represents income taxes payable for the period and the change during the period in deferred tax assets and liabilities

 

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•                       Management evaluates the recoverability of identifiable intangible assets and other long-lived assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 adopted on January 1, 2002 as discussed below in “Recently Issued Accounting Pronouncements.”  This statement generally requires the Company to assess these assets for recoverability when events or circumstances indicate a potential impairment by estimating the undiscounted cash flow to be generated from the use and ultimate disposition of these assets.

 

•                       On January 1, 2002, the Company adopted the accounting requirements set forth in SFAS No. 142, “Goodwill and Other Intangible Assets.”  Upon adoption of SFAS No. 142 the Company ceased amortization of goodwill and reclassified intangible assets acquired prior to July 1, 2001 that did not meet the criteria for recognition under SFAS No. 141.  Additionally, the initial application of this statement resulted in an impairment of goodwill of approximately $19.7 million to write down goodwill.  The amount of the impairment was estimated based on an independent valuation process that combined estimating the present value of the separate future cash flow of the Company’s U.S. and Canadian operations and was reported as a cumulative effect of change in accounting principle.  As a result of this impairment write down, the Company no longer has any goodwill balance.

 

•                       Management evaluates contingent liabilities including threatened or pending litigation in accordance with SFAS No. 5, “Accounting for Contingencies” and record accruals when the outcome of these matters is deemed probable and the liability is reasonably estimable.  Management makes these assessments based on the facts and circumstances and in some instances based in part on the advice of outside legal counsel.

 

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RECENT BUSINESS DEVELOPMENTS RELATING TO RAW MATERIALS

 

A significant portion of the Company’s product line contains encapsulated asbestos, which meets all current environmental safety standards.  The only North American sources of asbestos for the industry have been two mines located in Canada.  Due to a protracted work stoppage at one of the mines and a cessation of operations at the other, the asbestos used in the Company’s products became temporarily unavailable during the fourth quarter of fiscal year 2002. Despite this disruption in the supply of asbestos, the Company was able to meet its commitments to customers because it has equivalent non-asbestos formulations which can be readily substituted for the products containing asbestos.  Accordingly, the Company believes that its competitive position did not suffer.  By the beginning of 2003, the Company was once again able to obtain asbestos for use in its products from both mines, although there is no certainty that this raw material will be readily available throughout 2003 and further.

 

In addition to the asbestos shortage, during fiscal 2002 several customers that have traditionally purchased asbestos-bearing products indicated a preference for a non-asbestos product line. The non-asbestos formulas typically have higher raw material costs than asbestos-bearing products.  If the Company is not able to pass higher raw material costs on to its customers, gross profit margins could be affected.  On the other hand, since this issue affects many other makers of roof coatings, it is possible that the prices of roofing materials, generally, will increase and mitigate these cost increases.  At this juncture, it is not possible to accurately assess the long term financial impact of the raw material component change.

 

Currently the Company’s costs for petroleum related raw materials such as asphalt and mineral spirits are higher than they were at the comparable period one year ago, largely as a result of the increased price of oil.   With the conflict in the Middle East, it is possible that the price of oil could rise significantly from current levels, as has occurred in prior outbreaks of war in this region.  If this occurred, the costs of asphalt and mineral spirits would probably increase as well.  The Company would endeavor to pass these increased costs on to its customers but it is probable that there would be at least a short term negative cost impact to the Company.  Even further, there is also the possibility that there could be a lack of supply of certain petroleum based raw materials as a result of the outbreak of war. If this is the case there is no certainty that the Company would be able to find adequate raw material replacements to produce many of its products.

 

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BUSINESS SEGMENTS

 

The Company manages its business through two reportable segments or primary business units with separate management teams, infrastructures, marketing strategies and customers. The Company’s reportable segments are: the Henry Building Products Division, which develops, manufactures and markets roof and driveway coatings and paving products, industrial emulsions, air barriers, and specialty products; and the Resin Technology Division, which develops, manufactures and sells polyurethane foam for roofing and commercial construction. The Company evaluates the performance of its operating segments based on sales, gross profit and operating income. Intersegment sales and transfers are not significant.

 

Summarized financial information concerning the Company’s reportable segments is shown below.

 

		Henry Building Products Division			Resin Technology Division			Total
2002
Net sales		$	177,453,819		$	23,353,009		$	200,806,828
Gross profit		57,544,293			5,008,145			62,552,438
Operating income		9,766,842			921,135			10,687,977
Depreciation and amortization		5,056,396			168,705			5,225,101
Cumulative effect of change in accounting principle		(19,686,055		)	—			(19,686,055		)
Total assets		76,435,507			15,199,978			91,635,485
Capital expenditures		2,079,395			126,754			2,206,149
2001
Net sales		$	169,715,332		$	22,132,860		$	191,848,192
Gross profit		48,868,768			4,506,093			53,374,861
Operating income		2,116,708			779,839			2,896,547
Depreciation and amortization		7,126,923			187,725			7,314,648
Total assets		97,469,792			13,429,469			110,899,261
Capital expenditures		1,232,511			125,495			1,358,006
2000
Net sales		$	169,479,365		$	22,033,865		$	191,513,230
Gross profit		44,330,136			3,916,938			48,247,074
Operating income (loss)		(2,054,982		)	422,296			(1,632,686		)
Depreciation and amortization		7,424,855			166,043			7,590,898
Total assets		112,346,023			12,941,546			125,287,569
Capital expenditures		2,755,164			297,286			3,052,450

 

The Company is domiciled in the United States with foreign operations based in Canada which were acquired during 1998. Prior to the 1998 acquisition of Monsey Bakor, the Company had no foreign operations. Summarized geographic data related to the Company’s operations for 2002, 2001 and 2000 are as follows:

 

 

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RESULTS OF OPERATIONS

 

Consolidated Statements of Operations Data:

 

		2000			% of Sales		2001			% of Sales		2002			% of Sales
Net sales		$	191.5		100.0	%	$	191.9		100.0	%	$	200.8		100.0	%
Cost of sales		143.3			74.8	%	138.5			72.2	%	138.3			68.9	%
Gross profit		48.3			25.2	%	53.4			27.8	%	62.5			31.1	%
Operating expenses:
Selling, general and administrative		46.6			24.3	%	47.4			24.7	%	51.1			25.4	%
Restructuring charges		0.7			0.4	%	0.6			0.3	%	0.0			0.0	%
Amortization of intangibles		2.6			1.4	%	2.5			1.3	%	0.7			0.4	%
Operating income (loss)		(1.6		)	(0.8	)%	2.9			1.5	%	10.7			5.3	%
Interest expense		9.9			5.2	%	10.1			5.3	%	9.7			4.8	%
Interest and other income, net		(0.3		)	(0.2	)%	(0.2		)	(0.1	)%	(0.1		)	(0.0	)%
Income (loss) before benefit for taxes and change in accounting principle		(11.3		)	(5.9	)%	(7.0		)	(3.6	)%	1.1			0.5	%
Benefit for income taxes		(4.6		)	(2.4	)%	(1.6		)	(0.8	)%	(0.2		)	(0.1	)%
Income (loss) before cumulative effect of change in accounting principle		(6.7		)	(3.5	)%	(5.3		)	(2.8	)%	1.3			0.6	%
Cumulative effect of change in accounting principle		0.0			0.0	%	0.0			0.0	%	(19.7		)	9.8	%
Net loss		$	(6.7	)	(3.5	)%	$	(5.3	)	(2.8	)%	$	(18.4	)	(9.2	)%

 

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Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

 

Net Sales.  The Company’s net sales increased to $200.8 million for the year ended December 31, 2002, an increase of $8.9 million, or 4.6%, from $191.9 million for the year ended December 31, 2001. The increase was primarily due to increased sales resulting from the Home Depot agreement and product sales price increases enacted during the second quarter of 2002.

 

Gross Profit.  The Company’s gross profit increased to $62.5 million for the year ended December 31, 2002, an increase of $9.1 million, or 17.0%, from $53.4 million for the year ended December 31, 2001. Gross profit increased as a percentage of net sales to 31.1% for the year ended December 31, 2002 from 27.8% for the year ended December 31, 2001. Despite rising raw material costs during the second, third and fourth quarters of 2002, the Company's gross profit increased, primarily due to the Company’s success in increasing sales of its premium “Henry” branded products, passing on raw material cost increases (primarily related to petroleum based products) to its customers during 2002, and rationalization or elimination of certain lower margin items.

 

Selling, General and Administrative.  Selling, general and administrative expenses as a percentage of net sales increased to 25.4% for the year ended December 31, 2002 from 24.7% for the year ended December 31, 2001. The Company’s selling, general and administrative expense increased to $51.1 million for the year ended December 31, 2002, an increase of $3.7 million, or 7.8%, from $47.4 million for the year ended December 31, 2001.  Included in selling, general and administrative expenses were increased distribution costs of $2.6 million or 20.3% from 2001 to 2002, primarily due to increased costs associated with servicing the new Home Depot stores.

 

Amortization of Intangibles.  Amortization of intangibles decreased to $0.7 million for the year ended December 31, 2002, a decrease of $1.8 million, from $2.5 million for the year ended December 31, 2001. The decrease in amortization expense is primarily due to an accounting change associated with the Company’s adoption of SFAS No. 142 on January 1, 2002 that changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization expense is primarily due to the amortization of intangibles resulting from the acquisition of Monsey Bakor in 1998.

 

Operating Income.  The Company’s operating income amounted to $10.7 million for the year ended December 31, 2002, an increase of $7.8 million, from operating income of $2.9 million for the year ended December 31, 2001. The increase of $7.8 million was primarily attributable to higher sales volume, an improvement in gross margins, and the cessation of goodwill amortization.

 

Interest Expense.  Interest expense decreased to $9.7 million for the year ended December 31, 2002, a decrease of $0.4 million, or 4.0%, from $10.1 million for the year ended December 31, 2001. The decrease was primarily attributable to reduced working capital borrowings and declining interest rates associated with the generally lower interest rate environment in 2002.

 

Benefit for Income Taxes.  The benefit for income taxes decreased to $0.2 million for the year ended December 31, 2002, a decrease of $1.4 million, from a benefit of $1.6 million for the year ended December 31, 2001. The decrease was primarily due to the increase in operating income and decrease in interest expense.

 

Cumulative effect of change in accounting principle.  The Company recorded a $19.7 million charge for the year ended

December 31, 2002, resulting from the impairment of goodwill associated with the Company’s adoption of SFAS No. 142 that

changes the accounting for goodwill from an amortization method to an impairment-only approach.  SFAS No. 142 changed the

method for assessing goodwill impairments from an undiscounted cash flow method prescribed by SFAS No. 121 to a fair

market value approach. See Note 1 to the Consolidated Financial Statements.

 

Net Loss.  The net loss was $18.4 million for the year ended December 31, 2002, an increase of $13.1 million, from a $5.3 million net loss for the year ended December 31, 2001. The increase in the net loss was primarily due the cumulative effect of accounting change, partially offset by an increase in operating income.

 

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Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

 

Net Sales.  The Company’s net sales increased to $191.9 million for the year ended December 31, 2001, an increase of $0.4 million, or 0.2%, from $191.5 million for the year ended December 31, 2000. The increase was primarily due to product sales price increases enacted during the latter part of 2000 and 2001 partially offset by a decrease in unit sales volume in 2001.

 

Gross Profit.  The Company’s gross profit increased to $53.4 million for the year ended December 31, 2001, an increase of $5.1 million, or 10.6%, from $48.3 million for the year ended December 31, 2000. Gross profit increased as a percentage of net sales to 27.8% for the year ended December 31, 2001 from 25.2% for the year ended December 31, 2000. The increase was primarily attributable to the increased success of the Company in passing on raw material cost increases (primarily related to petroleum based products) to its customers during 2001, increased sales of its premium “Henry” branded products, rationalization or elimination of certain lower margin items and a decline in raw material costs during the fourth quarter of 2001.

 

Selling, General and Administrative.  Selling, general and administrative expenses as a percentage of net sales increased to 24.7% for the year ended December 31, 2001 from 24.3% for the year ended December 31, 2000. The Company’s selling, general and administrative expense increased to $47.4 million for the year ended December 31, 2001, an increase of $0.8 million, or 1.7%, from $46.6 million for the year ended December 31, 2000.  Included in selling, general and administrative expenses were expenses of $0.5 million for the transition to a new employee medical plan in mid-2001, and severance and related expenses of  $0.8 million not otherwise included in restructuring charges.

 

Restructuring Charges.  Restructuring charges amounted to $0.6 million for the year ended December 31, 2001.  These charges primarily relate to a plant closing, restructuring of the selling organization, the reorganization of certain operational and marketing functions and the related severance costs.

 

Amortization of Intangibles.  Amortization of intangibles decreased to $2.5 million for the year ended December 31, 2001, a decrease of $0.1 million, or 3.9%, from $2.6 million for the year ended December 31, 2000.  Amortization expense is primarily due to the amortization of intangibles resulting from the acquisition of Monsey Bakor in 1998.

 

Operating Income (Loss).  Operating income amounted to $2.9 million for the year ended December 31, 2001, an increase of $4.5 million, from the operating loss of $1.6 million for the year ended December 31, 2000. The increase of $4.5 million was primarily attributable to the increased gross profit, discussed above.

 

Interest Expense.  Interest expense increased to $10.1 million for the year ended December 31, 2001, an increase of $0.2 million, or 2.0%, from $9.9 million for the year ended December 31, 2000. The increase was primarily attributable to additional working capital borrowings, partially offset by declining interest rates due to the new credit facility and a generally lower interest rate environment in 2001.

 

Benefit for Income Taxes.  The benefit for income taxes decreased to a benefit of $1.6 million for the year ended December 31, 2001, a decrease of $3.0 million, from a benefit of $4.6 million for the year ended December 31, 2000. The decrease was primarily due to the decreased loss before income taxes and the decrease in related tax benefits.

 

Net Loss.  The net loss was $5.3 million for the year ended December 31, 2001, a decrease of $1.4 million, or 20.9% from a $6.7 million net loss for the year ended December 31, 2000. The reduction in the net loss was primarily due to sales price increases and the improvement in gross margin as noted above.

 

22

 

Liquidity and Capital Resources

 

The Company’s current requirements for capital are primarily for working capital, capital expenditures and debt service. The Company’s primary sources of capital to finance such needs are cash flow from operations and borrowings under bank credit facilities. In August 2001, the Company entered into a replacement credit facility agreement and received funding from two new lending institutions. The replacement credit facility provides for a $25 million revolving credit facility and a $10 million term loan. Upon closing, $3.5 million of the term loan was drawn down.  As of December 31, 2002, $3.0 million was outstanding on each of the term loan and the revolving line of credit. The remaining availability of credit under the revolver was $11.5 million at December 31, 2002. This senior credit facility expires in August 2006 and is collateralized by substantially all of the Company’s United States assets.  Term loan and line of credit borrowings both bear interest at the prime rate with an option to borrow based on the LIBOR rate. Both the Company’s credit facility and its bond indenture relating to its 10% Senior Notes outstanding include, among other restrictions, certain restrictions on the incurrence of additional debt.

 

The Company also maintains a $5.2 million credit line with a Canadian bank to finance Canadian operations. There was no balance outstanding under this revolving line at December 31, 2002. Availability under this facility at December 31, 2002 was $3.5 million. There are certain financial covenants associated with this credit line, including minimum interest coverage and working capital ratios, and maximum tangible net worth and debt to net worth measures. The Company was in compliance with all debt covenants as of year end.

 

The Company believes that cash from operations and fundings on its bank lines of credit will be sufficient to meet its working capital, capital expenditure, and debt service requirements for the next twelve months. There can be no assurance, however, that such resources will be sufficient to meet the Company’s anticipated working capital, capital expenditure, debt service or other financing requirements or that the Company will not require additional financing within this time frame.  The Company’s contractual obligations during the next few years and total contractual obligations are as follows:

 

 

		Contractual Payments Due by Period
Contractual Obligations		Less than 1 Year			1-3 years			4-5 years			After 5 years			Total
Long-Term Debt and Credit Facility		$	3,603,740		$	1,258,126		$	1,511,440		$	81,250,000		$	87,623,306
Capital Lease Obligations		—			—			—			—			—
Operating Leases(a)		1,363,399			1,399,082			744,642			2,205,109			5,712,232
Unconditional Purchase Obligations		—			—			—			—			—
Other Long-Term Obligations(b)		—			1,000,000			1,000,000			1,000,000			3,000,000
Total Contractual Cash Obligations		$	4,967,139		$	3,657,208		$	3,256,082		$	84,455,109		$	96,335,538

 

(a)        Consists of property and auto leases.

(b)                        Assumes Mr. Mooney, a director and shareholder of the Company, will exercise his put option on redeemable convertible preferred stock.  This put is first exercisable by Mr. Mooney in January 2004.

 

 

The Company’s primary sources of capital are cash flows from operations and borrowings under bank credit facilities, each of which could be negatively impacted by a reduction in demand for the Company’s products.  Demand for the Company’s products is affected by many factors, including weather, competition, and the competitive position of the Company’s customers.  A reduction in demand for the Company’s products in some or all of the Company’s markets could have an adverse impact on the Company’s liquidity.  See Part I, Item 1 “Business - Risk Factors” of the Annual Report on Form 10-K for more detail.

 

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Cash Flows for the Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001

 

The Company’s net cash provided by operations was $6.3 million compared to $6.5 million for the years ended December 31, 2002 and 2001, respectively. The decrease in cash provided by operations from December 31, 2001 to December 31, 2002 of $0.2 million was primarily attributable to increases in trade receivables and inventories, partially offset by collections of receivables from affiliate and an increase in accounts payable and accrued liabilities. Net cash used in investing activities during the year ended December 31, 2002 and the year ended December 31, 2001 was  $2.1 million and $1.3 million, respectively. The increase in cash used in investing activities of $0.8 million from the year ended December 31, 2001 to the year ended December 31, 2002 was primarily due to increased capital expenditures of $0.8 million.  Cash flows used in financing activities during the year ended December 31, 2002 were $3.7 million compared to $5.7 million used in financing activities for the year ended December 31, 2001. The decrease in cash used by financing activities of $2.0 million from the year ended December 31, 2001 to December 31, 2002 was primarily due to a smaller reduction in borrowings under the line of credit agreement and a smaller reduction in book overdrafts from 2001 to 2002.

 

Recently Issued Accounting Pronouncements

 

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) Nos. 141 and 142 (“SFAS No. 141” and “SFAS No. 142”), “Business Combinations” and “Goodwill and Other Intangible Assets”.   SFAS No. 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under SFAS No. 142, goodwill is tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. SFAS No. 141 and SFAS No. 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of SFAS No. 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 ceased, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under SFAS No. 141 were reclassified to goodwill. The Company adopted SFAS No. 142 on January 1, 2002 and completed its goodwill impairment test during the second quarter of 2002.  Based on the results of the impairment test, the Company recorded a cumulative effect of change in accounting principle transitional impairment loss of approximately $19.7 million in 2002.

 

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.  All provisions of this Statement will be effective at the beginning of fiscal year 2003.  The Company is in the process of determining the impact of this Statement on the Company’s financial statements.

 

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  This Statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” and amends APB Opinion No. 30, “Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.”  This Statement requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less costs to sell.  SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale.  This Statement also retains APB Opinion No. 30’s requirement that companies report discontinued operations separately from continuing operations.  All provisions of this Statement were effective in the first quarter of fiscal year 2002.  The adoption of this standard did not have a significant impact on the Company’s financial position, results of operations, or cash flows.

 

In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.”  This Statement rescinds FASB Statement No. 4, “Reporting Gains and

 

24

 

Losses from Extinguishment of Debt,” and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.”  This Statement amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions.  This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions.  The provisions of this Statement related to the rescission of Statement No.4 are effective beginning in fiscal year 2003.  All other provisions were effective after May 15, 2002.  The provisions adopted on May 15, 2002 did not have a significant impact on the Company’s financial results.  The Company is in the process of determining the impact of this Statement on the Company’s financial results for those provisions effective in fiscal year 2003.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities.” SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in the EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”  The scope of SFAS No. 146 also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract.  SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 with earlier adoption encouraged.  The Company does not anticipate that the adoption of SFAS No. 146 will have a significant impact on the Company’s financial position, results of operations, or cash flows.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”  This Interpretation clarifies the requirements for a guarantor’s accounting for and disclosures of certain guarantees issued and outstanding.  This Interpretation also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations the guarantor has undertaken in issuing that guarantee.  The disclosure provisions of the Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has adopted the disclosure provisions of this Interpretation as disclosed in Note 1 and Note 5 to the consolidated financial statements. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.  The Company is currently in the process of determining the impact of this Interpretation on the Company’s financial results for those provisions effective in 2003.

 

The Company is currently reviewing the requirements of EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities.  Specifically, EITF Issue No. 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting.  The provisions of EITF Issue No. 00-21 will be effective in fiscal periods beginning after June 15, 2003.  The Company is in the process of determining the impact of EITF Issue No. 00-21 on the Company’s financial results when effective.

 

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ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk generally represents the risk that losses may occur in the value of financial instruments as a result of movements in interest rates, foreign currency exchange rates and commodity prices. As part of its overall risk management strategies, the Company monitors and manages these risks by reviewing key trends and indicators on a continuous basis.

 

Interest Rate Risk—From time to time, the Company temporarily invests its excess cash in interest bearing temporary investments of high quality issuers or with major financial institutions. Due to the short–term maturity of the investments are outstanding and their general liquidity, these instruments are classified as cash equivalents in the consolidated balance sheet and do not represent a material interest rate risk to the Company. The Company’s primary market risk exposure for changes in interest rates relates to the Company’s debt obligations. The Company manages its exposure to changing interest rates principally through the use of a combination of fixed and floating rate debt. The majority of the Company’s long–term debt is comprised of $81.3 million of Series B Senior Notes which represent fixed rate borrowings. The reported fair value of the Senior Notes at December 31, 2002 was approximately $52.8 million. The Company believes that near term changes in interest rates would not have a significant impact on the Company’s financial position as the Company had a limited amount of interest rate risk sensitive financial instruments at December 31, 2002.

 

Foreign Exchange Rate Risk—The Company conducts business principally in North America and in U.S. and Canadian currencies. The Company’s U.S. operations denominate all sales transactions in U.S. dollars. The Company’s Canadian subsidiaries are paid in Canadian dollars for sales made in Canada. Excess Canadian funds generally have been invested in the Canadian operation rather than being remitted to the U.S. parent. At December 31, 2002, the Company had no foreign currency exchange contracts or hedging instruments.

 

Commodity Price Risk—The Company uses certain raw materials in its manufacturing process that fluctuate with certain commodity prices. These raw materials include asphalt, aluminum paste, rubber and certain diisocyanates.  The Company continuously monitors key trends in the commodity prices impacting raw materials. At December 31, 2002, the Company had no commodity risk hedges or derivative instruments.

 

 

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The consolidated financial statements of Henry Company are included in a separate section of this Annual Report on Form

10–K.

 

ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

NONE

 

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PART III

 

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The following table sets forth certain information regarding each of the Company’s directors and executive officers as of December 31, 2002:

 

Name		Age		Position
Warner W. Henry(1)(2)(3)		64		Chairman of the Board and Chief Executive Officer
Joseph T. Mooney, Jr.(1)		68		Vice Chairman of the Board
Paul H. Beemer(1)		80		Vice Chairman of the Board
William H. Baribault(1)(2)(4)		57		President, Chief Operating Officer and Director
Jeffrey A. Wahba(1)(2)		46		Chief Financial Officer, Secretary and Director
James Doose		54		President—Resin Technology Company
Larry A. Karasiuk		58		President—Bakor Division
Norman F. Nickerson(5)		62		President—Henry Building Products Division
Frederick H. Muhs(1)(2)(3)		64		Director
Carol F. Henry		63		Director
Terrill M. Gloege(1)(2)(3)		67		Director

 

(1)           Member of the Executive Committee

 

(2)           Member of the Audit Committee

 

(3)           Member of the Compensation Committee

 

(4)                                  In January 2001, William H. Baribault was appointed the acting President and Chief Operating Officer, and in August 2001 Mr. Baribault was appointed President and Chief Operating Officer.

 

(5)           In December 2002, Mr. Nickerson retired.

 

Warner W. Henry has been Chairman of the Board, Chief Executive Officer and a director of Henry Company or its parent since 1974, and has served in various sales and sales management positions with Henry Company from 1963 to 1974. Mr. Henry also serves on the board or is an Overseer of the following organizations: The Employers Group, The Henry Wine Group, Hoover Institution, Los Angeles Music Center Opera and the Los Angeles Chamber Orchestra. Mr. Henry received his A.B. in Economics from Stanford University and his M.B.A. from Stanford University, Graduate School of Business.

 

William H. Baribault has been President, Chief Operating Officer, and a director of Henry Company since August 2001.  Prior to joining Henry, he was a partner of Eagle Associates, an investment banking and consulting firm.  From 1975 to 1999, Mr. Baribault held various positions including Chairman and CEO of Elect///Air, The Fornaciari Company, and Fluid Power Locator, and Vice President of Applied Industrial Technologies, all distributors and manufacturers of pneumatic and hydraulic automation components.  Mr. Baribault also serves as Chairman of Professional Business Bank. He is director or trustee on the boards of Architectural Woodworking Company, Chief Executives Organization, Descanso Gardens, Eagle Investments, Flintridge Preparatory School, M Chemical Company, Phillips Plywood, and Supplypro.  Mr. Baribault received his A.B. degree from Stanford University.

 

Joseph T. Mooney, Jr. has served as a Vice Chairman of the Board of the Company since the closing of the Monsey Bakor acquisition. Mr. Mooney began his career with Monsey Bakor in 1960 and previously served as Chairman of the Board and President of Monsey Bakor from 1972 to April 1998, where his responsibilities included major strategic decisions regarding product and equipment purchases as well as oversight of all of Monsey Bakor’s financial operations. Mr. Mooney received a B.S. from Villanova University.

 

Paul H. Beemer has served as Vice Chairman of Henry Company since 1983, and as a director of Henry Company or its parent since 1964. Mr. Beemer began with Henry Company in 1947, holding various technical and sales management

 

27

 

positions, and has also served as General Manager and President. Mr. Beemer was responsible for the formulation and development of a number of Henry Company’s key products and continues to serve in a part–time technical consulting role. Mr. Beemer received a B.S. from Loyola University in Los Angeles.

 

Jeffrey A. Wahba has been Chief Financial Officer, Secretary and a director of Henry Company since 1986. From 1984 to 1985, Mr. Wahba served as Chief Financial Officer of Vault Corporation. From 1980 to 1984, Mr. Wahba was with Max Factor and Co. and served as Controller of the International Division.  He is also a director of The Henry Wine Group.  Mr. Wahba received a B.S. in Industrial Engineering and an M.S. in Industrial Engineering and Engineering Management from Stanford University, as well as an M.B.A. from the University of Southern California.

 

James Doose has been the President of Resin Technology Company since 1994. Mr. Doose and a partner founded Resin Technology Company in 1982. Mr. Doose served as Executive Vice President of Resin Technology Company from 1982 to 1994. From 1973 to 1982, Mr. Doose was with Reichold Chemical Company in various sales and technical positions. Mr. Doose received a B.S. in Chemistry from California Polytechnic University at Pomona.

 

Larry A. Karasiuk has served as President—Bakor Canada since the closing of the Monsey Bakor acquisition. Mr. Karasiuk served as the President of Bakor Holdings, Inc. and as the President of Monsey Bakor’s Canadian operations beginning in 1991. From 1982 to 1991, Mr. Karasiuk was the Vice President of Marketing and Sales with the predecessor company of Bakor Holdings, Inc., Bakelite Thermosets Building Materials Division. Prior to that time, Mr. Karasiuk served in various management positions with Hunter Douglas, a subsidiary of Alcan. Mr. Karasiuk attended Simon Fraser University and York University.

 

Norman F. Nickerson has served as Executive Vice President of the Henry Building Products Division since the closing of the Monsey Bakor acquisition until February 2001 when he was named President of the Henry Building Products Division. Mr. Nickerson served as Vice President of Sales of Monsey Bakor from 1985 to 1998. From 1979 to 1985, Mr. Nickerson was General Manager of Monsey Bakor’s Southeastern division. From 1972 to 1979, Mr. Nickerson was General Manager of Cosmicoat, Inc. Mr. Nickerson received his B.A. in History from Allegheny College.  In December 2002, Mr. Nickerson retired.

 

Frederick H. Muhs has been a director of Henry Company since 1996. Since 1991, Mr. Muhs has been a private investor and business consultant. From 1963 to 1990, Mr. Muhs held various positions in the investment and investment banking operations of the Prudential Insurance Company of America, including as Managing Director for its Prudential Bache Securities, Inc. subsidiary.  He is also a director of The Henry Wine Group. Mr. Muhs received an A.B. in Economics from Stanford University and his M.B.A. from Stanford University, Graduate School of Business.

 

Carol F. Henry has been a director of Henry Company since 1970. She is currently involved with several civic and charitable organizations. Mrs. Henry received an A.B. and M.A. in Education from Stanford University.

 

Terrill M. Gloege has been a director of Henry Company since 1993. From 1963 to 2001 Mr. Gloege held various management consulting and financial positions including Chief Financial Officer of Six Flags Corporation, International Technology Corporation and Carson Estate Trust, from which he retired in 2001.  He is currently Consultant to the Board of Trustees of Carson Estate Trust and director of The Henry Wine Group.  Mr. Gloege received a B.S. from the United States Coast Guard Academy and an M.B.A. from Stanford University.

 

The Company’s bylaws provide that the Board of Directors of the Company shall consist of nine directors. The number of authorized directors may be increased or decreased from time to time by an amendment to the bylaws adopted by the Board of Directors or by the Company’s shareholders. Directors are elected at each annual meeting of the Company’s shareholders to hold office until the next annual meeting and until their successors have been elected and qualified. Executive officers are appointed by the Board of Directors and serve at the Board’s discretion, subject to any contracts of employment with the Company.

 

Warner W. Henry and Carol F. Henry are husband and wife.

 

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Board Committees

 

The Executive Committee is comprised of Warner W. Henry, Paul H. Beemer, Joseph T. Mooney, Jr., William H. Baribault, Terrill M. Gloege, and Frederick H. Muhs. Jeffrey A. Wahba serves as Secretary of the Executive Committee without a vote. The Executive Committee has the full authority of the Board of Directors, except with respect to the approval of any action for which shareholder approval is required by law or for certain other fundamental corporate actions, which require the act of the full Board. The Audit Committee is comprised of Warner W. Henry, Terrill M. Gloege, Jeffrey A. Wahba, William H. Baribault, and Frederick H. Muhs. The Audit Committee oversees the activities of Henry Company’s independent accountants. Mr. Gloege serves as Chairman of the Audit Committee. The Compensation Committee is comprised of Warner W. Henry, Terrill M. Gloege and Frederick H. Muhs.

 

Executive and Director Compensation

 

The Company’s directors do not receive any cash compensation for service on the Board of Directors or any Committee thereof, but directors may be reimbursed for certain expenses in connection with attendance at board and committee meetings.

 

The Compensation Committee and William H. Baribault monitor the Company’s compensation policies and review executive and employee annual compensation increases. Mr. Baribault’s compensation was determined by the Compensation Committee without the participation of Mr. Baribault and increases in Mr. Henry’s annual compensation are determined by the Executive Committee without the participation of Mr. Henry. No executive officer of the Company serves as a member of the Board of Directors of any other entity that has one or more members serving as a member of the Company’s Board of Directors.

 

Paul H. Beemer is compensated for consulting advisory services pursuant to a consulting agreement with the Company with compensation established at $100,000 per year. The consulting agreement contains a noncompetition clause restricting Mr. Beemer’s employment or service with a business entity that competes with the Company in its present or future marketing areas. Mr. Beemer’s consulting agreement expires on June 30, 2003. In fiscal years 2002, 2001, and 2000, Mr. Beemer received $100,000 in compensation under his consulting agreement.

 

Mr. Mooney is also an employee of the Company and receives an annual salary.  Mr. Mooney recieved $180,250 in salary and bonus for each of fiscal years 2002 and 2001, and $236,672 for fiscal year 2000.

 

In connection with services provided by The Muhs Company, Inc., Frederick H. Muhs provides certain business and financial consulting services to Henry Company. Henry Company pays The Muhs Company, Inc. a retainer of $8,333 per month for these services. In fiscal year 2002, The Muhs Company, Inc. received $100,000 for business and financial consulting services. See “Certain Transactions.”

 

Henry Company receives business and financial consulting services from Terrill M. Gloege, a director of the Company, who is also as the Trustee of the William Warner Henry, Catherine Anne Henry, and Michael Andrew Henry Trusts established under the Henry Trust dated 9/17/93. Henry Company paid $30,000 for these services in 2002 and $10,000 in 2001.

 

29

 

ITEM 11.      EXECUTIVE COMPENSATION

 

The following table sets forth certain information concerning compensation received for services rendered to Henry Company in all capacities during the fiscal year ended December 31, 2002 by Henry Company’s Chief Executive Officer and each of Henry Company’s four other most highly compensated executive officers whose annual salary and bonus for the year ended December 31, 2002 exceeded $100,000 (collectively, the “Named Executive Officers”):

 

		Annual Compensation
Name and Principal Position		Year		Salary			Bonus			Other Annual Comp.(1)		Long-Term Incentive Plan LTIP Payout		All Other Compensation
Warner W. Henry		2002		$	395,000		$	250		—		—		$	4,035
Chairman of the Board and Chief		2001		285,000			250			—		—		4,013
Executive Officer		2000		285,000			—			—		—		4,022
William H. Baribault		2002		310,000			402,720			—		—		12,600
President and Chief Operating		2001		117,115			150,000			—		—		181,400
Officer		2000		—			—			—		—		—
James Doose		2002		268,320			104,535			7,507		—		9,600
President—Resin Technology		2001		257,692			82,436			—		—		778
Company		2000		250,307			60,900			—		—		778
Steve Gast Products		2002		200,000			134,441			10,969		—		4,015
Vice President—Building Products		2001		164,558			41,000			2,671		—		3,532
Division		2000		154,000			28,000			3,394		—		25,675
Jeffrey A. Wahba		2002		192,500			129,400			3,419		—		6,003
Chief Financial Officer		2001		182,050			10,000			4,049		11,517		5,997
		2000		170,950			5,000			4,383		9,129		5,887

 

(1)                                  “Other Annual Compensation” represents contributions to the accounts of the Named Executive Officers under Henry Company’s Nonqualified Executive Deferral Plan and Profit Sharing/401(k) Plan. See “Executive Deferral Plan” and “Profit Sharing/401(k) Plan.”

 

30

 

Warrant Grants Outstanding

 

The following table provides certain information regarding warrants to purchase shares of Henry Company’s capital stock outstanding to any Named Executive Officer during the fiscal years ended December 31, 2001 and 2002:

 

Warrant Grants

 

		Individual Grants
Name		Number of Securities Underlying Warrants Granted		% of Total Warrants Granted to Employees in Fiscal Year		Exercise Price(2)			Expiration Date		Grant Date Present Value(3)
Warner W. Henry		400,000	(1)	100		$	15.53		9/30/12		$	44,000

 

(1)                                  On October 1, 1997 Henry Company granted the Warner W. Henry Living Trust warrants to purchase an aggregate of 400,000 shares of Henry Company capital stock, consisting of 12,000 shares of Class A Common Stock and 388,000 shares of Common Stock (the “Henry Warrants”). The Henry Warrants expire on September 30, 2012 and may be exercised in whole or in part at variable and increasing exercise prices over the term of the Henry Warrants. The current and maximum exercise prices of the Henry Warrants for both Class A Common Stock and Common Stock are $15.53 and $38.82 per share, respectively. Warner W. Henry is the trustee of the Warner W. Henry Living Trust and may be assumed to have beneficial ownership of the Henry Warrants and shares purchasable upon exercise of the Henry Warrants. The Henry Warrants were issued as further consideration for certain loans made to Henry Company by Mr. Henry.

 

(2)                                  The warrants have an exercise price that exceeded the fair value of the capital stock at the date of grant.

 

(3)                                  The grant date present value of each warrant is estimated at $0.11 using the Black-Scholes pricing model with the following assumptions: risk-free rate of return of 6.0%, expected warrant life of 15 years; forfeiture rate of zero (0); volatility of 20%; no expected dividends; and no adjustments for non-transferability.

 

Executive Deferral Plan

 

Henry Company has adopted an Executive Deferral Plan (the “Plan”) to allow certain management personnel and highly compensated employees to defer a portion of their annual salary and bonus to be paid at a future date chosen by them or upon their retirement, death, disability or termination of employment. Participants in the Plan are selected by an administrative committee (the “Plan Committee”) appointed by the Board of Directors which establishes eligibility qualifications and manages and administers the Plan. To participate in the Plan for any year, a participant must make an irrevocable election to defer at least $2,000 to a maximum of 100% of his or her base salary and bonus for such year prior to the beginning of the year for which the salary and bonus relate. For each Plan year Henry Company may contribute to each participant’s account at the Plan Committee’s discretion. Deferred amounts are credited with interest at the September “Moody’s Seasoned Corporate Bond” rate that is published prior to the end of the Plan year preceding the Plan year for which the rate is used. Participants are at all times fully vested in their deferred compensation accounts except in the event of a termination of their employment, in which case participants are vested to only a percentage of any Company contributions that have been made, calculated according to the executive’s number of years of employment. At the time of deferral, participants may elect to receive future short–term payouts with respect to each year’s deferral, payable in a lump sum not prior to the sixth Plan year following such deferral. Amounts payable to a participant pursuant to the Plan are unfunded amounts to be paid from the general assets of the Company and are at all times subject to the risk of the Company’s business. The Company funds the Plan with whole life insurance policies.

 

Profit Sharing/401(k) Plan

 

The Company sponsors a deferred qualified profit–sharing plan with a 401(k) feature covering salaried and hourly employees of Henry Company and its affiliates, other than union employees, who have completed six months of service. Contributions made to the profit–sharing plan by the Company are based on the Company’s performance and are at the discretion of the Board of Directors.  The Company has not made any contributions to the profit-sharing plan during the years 2000 through 2002. In 2000 and 2001 participants in the 401(k) Plan were permitted to contribute up to 15% of their annual compensation to the 401(k) Plan through salary deferral up to a maximum of $10,500 of a participant’s annual compensation.

 

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Commencing in 2002, participants could contribute up to 60% of their annual compensation up to a maximum $11,000; additionally participants over age 50 could make catch-up contributions up to maximum $1,000.  In 1999, the 401(k) plan was amended to include a discretionary Company matching contribution to eligible participants.  The Company has provided matching contributions to its eligible U.S. based employees from 1999 through 2002.

 

Employment Agreements and Compensation Arrangements

 

Henry Company has entered into employment agreements with Mr. Baribault and Mr. Doose, and an incentive compensation agreement with Mr. Wahba.

 

Mr. Baribault’s employment agreement provides for an annual base salary of $300,000, subject to annual review by the Company’s Board of Directors.  Mr. Baribault also receives annual bonuses based on the Company’s operating performance relative to the target performance set forth in the Company’s annual operating plan.  If Mr. Baribault is terminated without cause, he is entitled to earned base compensation plus any earned performance bonus during the year of termination.  He is also entitled to severance pay that is a multiple of annual base salary, determined by years of service.  Mr. Baribault’s employment agreement terminates December 31, 2005.

 

Mr. Doose’s employment agreement provides for a base salary, subject to annual cost–of–living and discretionary increases. For 2002, Mr. Doose’s base salary was $268,320. Mr. Doose also receives annual bonuses based on the net operating profits of RTC.  If Mr. Doose is terminated without cause, he is entitled to base compensation plus the bonus calculated on net operating profits for the remaining term of the agreement.  Mr. Doose’s employment agreement was revised in December, 2002 and among other changes, was extended to terminate on January 1, 2006.

 

Mr. Wahba and the Company entered into an Incentive Compensation Agreement in 1988 which was subsequently revised in 1994.  In December, 2002 the Company and Mr. Wahba agreed to terminate the Incentive Compensation Agreement upon payment of the accrued Deferred Benefit Amount in 2003.  Since Mr. Wahba was the last remaining executive with this type of incentive compensation plan, the Company and Mr. Wahba mutually agreed to terminate the plan.  Mr. Wahba is now part of a bonus plan that is similar to that of a number of the Company’s other senior executives.  In consideration for this change, the Company has agreed to certain minimum bonus payments through 2008 as long as Mr. Wahba is employed with the Company.

 

Indemnification of Directors and Officers

 

The Company’s Articles of Incorporation authorize the indemnification of Company officers and directors to the fullest extent permissible under California law. Subject to the Articles of Incorporation and California law, the Bylaws provide that Henry Company shall indemnify each of its directors and officers against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that any person is or was a Company director or officer. The Company maintains directors and officers liability insurance coverage.

 

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following sets forth information regarding beneficial ownership of the Common Stock and the Class A Common Stock of the Company as of December 31, 2002. Henry Company believes that persons and entities named in the table have sole voting and investment power with respect to all shares of Class A Common Stock and Common Stock shown as beneficially owned by them, subject to community property laws, where applicable. There is no established public trading market for any class of Henry Company’s equity securities.

 

32

 

		Beneficial Ownership of Common Stock				Beneficial Ownership of Class A Common Stock				Total Voting Power (1)(2)(3) (4)(5)		Total Economic Interest (1)(2)(3)(4)
Name and Address of Beneficial Owner		Number of Shares		Percent (1)(2)(3)		Number of Shares		Percent		Percent		Percent
Warner W. Henry, Trustee, Warner W. Henry Living Trust(6) 2911 Slauson Ave. Huntington Park, CA 90255		388,000	(1)	53.0	%	18,000	(4)	100.0	%	74.7	%	54.1	%
Terrill M. Gloege as Trustee of the William Warner Henry Trust established under the Henry Trust dated 9/17/93 2911 Slauson Ave. Huntington Park, CA 90255		64,106		8.8		—		—		4.7		8.6
Terrill M. Gloege as Trustee of the Catherine Anne Henry Trust established under the Henry Trust dated 9/17/93 2911 Slauson Ave. Huntington Park, CA 90255		64,106		8.8		—		—		4.7		8.6
Terrill M. Gloege as Trustee of the Michael Andrew Henry Trust established under the Henry Trust dated 9/17/93 2911 Slauson Ave. Huntington Park, CA 90255		64,106		8.8		—		—		4.7		8.6
Frederick H. Muhs		82,500	(2)	11.3		—		—		6.1		11.0
Joseph T. Mooney, Jr		67,500	(3)	9.2		—		—		5.0		9.0
Carol F. Henry		1,682		0.2		—		—		0.1		0.2

 

(1)                                  Assumes exercise of the Henry Warrants to purchase 388,000 shares of Common Stock which expire on September 30, 2012. The warrants may be exercised in whole or in part at variable exercise prices which increase over the term of the warrant. The current and maximum exercise prices for such Common Stock is $15.53 and $38.82 per share, respectively. See “Executive Compensation.”

 

(2)                                  Assumes the exercise of Mr. Muhs’ right to purchase up to 55,000 shares of Common Stock in amounts sufficient to maintain his current percentage of economic interest in the Company following the exercise of any of the Henry Warrants (and the purchase of shares of Common Stock by Mr. Mooney pursuant to his similar rights).

 

(3)                                  Assumes the conversion of Mr. Mooney’s redeemable convertible preferred stock into 22,500 shares of Common Stock and the exercise of Mr. Mooney’s right to purchase up to 45,000 shares of Common Stock in amounts sufficient to maintain his current percentage of economic interest in the Company following the exercise of any of the Henry Warrants (and the purchase of shares of Common Stock by Mr. Muhs pursuant to his similar right).

 

(4)                                  Assumes exercise of the Henry Warrants to purchase 12,000 shares of Class A Common Stock which expire on September 30, 2012. The warrants may be exercised in whole or in part at variable exercise prices which increase over the term of the warrants. The current and maximum exercise prices for such Class A Common Stock is $15.53 and $38.82 per share, respectively. See “Executive Compensation.”

 

(5)                                  The Common Stock and the Class A Common Stock vote together as a single class. However, each share of Class A Common Stock entities the holder to 35 votes on all matters for which there is a vote, while each share of Common Stock entitles the holder to one vote on all such matters.

 

33

 

(6)                                  Warner W. Henry is the trustee of the Warner W. Henry Living Trust and may be assumed to have beneficial ownership of all shares and warrants held by the trust. Amount shown does not include 1,682 shares owned by Carol Henry, as to which shares Mr. Henry disclaims beneficial ownership.

 

 

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

The Company leases its Huntington Park headquarters from a family trust and living trust for which Warner W. Henry is the trustee pursuant to three separate real property leases. These leases expire in 2006 and 2016. The total rent paid in 2001 and 2002 for the Huntington Park leases was approximately $424,900 each year.  The Company believes that the rent paid under the above leases represent substantially fair market value and that the other terms and conditions of the leases are commercially reasonable.

 

The Company leased additional property at its Huntington Park headquarters from Alamo Development Company until February, 2003 at which time it purchased the property for $773,362.  In 2002, the Company paid rent of $39,371 pursuant to this lease which was subject to annual adjustments to reflect changes in the Bank of America prime rate. Frederick H. Muhs, a director of the Company, is a shareholder of Alamo Development Company along with certain other members of his family. At the same time as the purchase of the Huntington Park property, the Company sold property located in Kimberton, Pennsylvania to Alamo Development Company for $750,000.  At one time this property was utilized by the Company for its own operations, but more recently it has been leased to two separate third parties for their own use. The Company believes that both the purchase of the Huntington Park property and the sale of the Kimberton property were completed at their fair market value.

 

Henry Company performs certain administrative services for an affiliate, Henry II Company a California corporation, pursuant to an administrative services agreement that provides for payments from Henry II Company to Henry Company for such services. These payments totaled $0.8 million in 2000 and 2001, and $0.4 million in 2002. The administrative services fee was reduced in 2002 as certain administrative functions were no longer performed by the Company for Henry II.   Henry II Company’s shareholders are Warner W. Henry, Carol Henry, and certain trusts for the benefit of their children.

 

At December 31, 1997, Henry Company received a note from Henry II Company for $1.9 million representing the purchase price for its interest in certain real property. Such real property related solely to the business of Henry II, Inc. and had a net book value of $1.9 million. The note bears interest at the prime rate, and is repayable in a lump sum at any time up to December 31, 2004. The principal balance of such note was $1.9 million at December 31, 2001 and 2002.

 

In addition, at December 31, 2002, Henry II Company owed $0.3 million to Henry Company, representing past advances made on behalf of Henry II, Inc. The note evidencing this debt does not bear interest and is payable upon demand.

 

Henry Company receives business and financial consulting services from The Muhs Company, Inc., of which Frederick H. Muhs, a director of the Company, is the President and controlling shareholder. Henry Company paid $75,000 for these services in 2000 and 2001 and $100,000 in 2002. See “Executive Compensation.”

 

Joseph T. Mooney, Jr. is a Director and also an employee of the Company and receives an annual salary.  Mr. Mooney recieved $180,250 in salary and bonus for each of fiscal years 2002 and 2001, and $236,672 for fiscal year 2000.

 

Paul H. Beemer is compensated for consulting advisory services pursuant to a consulting agreement with the Company with compensation established at $100,000 per year. The consulting agreement contains a noncompetition clause restricting Mr. Beemer’s employment or service with a business entity that competes with the Company in its present or future marketing areas. Mr. Beemer’s consulting agreement expires on June 30, 2003. In fiscal years 2000, 2001, and 2002 Mr. Beemer received $100,000 in compensation under his consulting agreement.

 

Henry Company receives business and financial consulting services from Terrill M. Gloege, a director of the Company, who is also as the Trustee of the William Warner Henry, Catherine Anne Henry, and Michael Andrew Henry Trusts established under the Henry Trust dated 9/17/93. Henry Company paid $30,000 for these services in 2002 and $10,000 in 2001.

 

In connection with the Monsey Bakor acquisition, the Company sold 22,500 shares of redeemable convertible preferred stock in the Company to Joseph T. Mooney, Jr., a director of the Company, for $600,000. The Company is obligated, upon the exercise of Mr. Mooney’s put option, to redeem the stock for cash in annual amounts of $500,000 beginning in 2004 and

 

34

 

aggregating $3,000,000, or for $3,000,000 upon the death of Mr. Mooney. The shares are convertible into shares of Common Stock.

 

The Company is a party to employment and consulting agreements with certain directors and officers of the Company. See “Executive Compensation-Employment Agreements and Compensation Arrangements.”

 

ITEM 14.      CONTROLS AND PROCEDURES

 

Based on their evaluation as of a date within 90 days of the filing date of this Annual Report on Form 10-K, the principal executive officer and principal financial officer of Henry Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-14[c] and 15d-14[c] under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

 

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the date of their most recent evaluation.

 

35

 

PART IV

 

ITEM 15.                 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8–K
                                                              (A) DOCUMENTS FILED AS PART OF THIS REPORT

 

(a) (1) Financial Statements

 

The Consolidated Financial Statements of Henry Company are contained herein.

 

(2) Financial Statement Schedules

 

The financial statement Schedule II Valuation and Qualifying Accounts and Reserves of Henry Company is contained herein.  All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable, not required, or the information is included in the consolidated financial statement or notes there to.

 

(3) Exhibits

 

See Exhibit Index

 

Since the Company does not have securities registered under Section 12 of the Securities Exchange Act of 1934 and is not required to file periodic reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company is not an "issuer" as defined in the Sarbanes-Oxley Act of 2002, and therefore the Company is not filing the written certification statement pursuant to Section 906 of such Act.  The Company files periodic reports with the Securities and Exchange Commission because it is required to do so by the terms of the indenture governing its senior subordinated notes.

 

(b) Reports on Form 8-K

 

The Company did not file any reports on Form 8–K during the quarter ended December 31, 2002.

 

HENRY COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Henry Company

Report Of Independent Accountants

Consolidated Balance Sheets

Consolidated Statements Of Operations

Consolidated Statements Of Shareholders’ Equity

Consolidated Statements Of Cash Flows

Notes To Consolidated Financial Statements

Schedule

II. Valuation and Qualifying Accounts and Reserves

 

36

 

REPORT OF INDEPENDENT ACCOUNTANTS

 

To the Board of Directors,

Bond Holders and Shareholders

of Henry Company

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Henry Company and its subsidiaries (the “Company’) at December 31, 2002 and December 31, 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the accompanying index, presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.  We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 1, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” and recorded a cumulative effect of change in accounting principle of $19.7 million for the impairment of goodwill upon adoption.

 

/s/    PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 14, 2003

 

37

 

HENRY COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2002

 

		2001			2002
ASSETS:
Current assets:
Cash and cash equivalents		$	425,695		$	1,013,102
Trade accounts receivable, net of allowance for doubtful accounts of  $2,760,591 and  $2,330,194 for 2001 and 2002, respectively		23,643,661			28,091,213
Inventories, net		13,260,850			15,909,609
Receivables from affiliate		1,476,147			281,362
Notes receivable		42,849			29,144
Prepaid expenses and other current assets		1,393,403			2,264,405
Income tax receivable		2,416,536			745,519
Deferred income taxes		1,141,127			1,376,266
Total current assets		43,800,268			49,710,620
Property and equipment, net		30,276,860			27,612,817
Cash surrender value of life insurance, net		3,597,967			2,218,204
Intangibles, net		24,158,525			3,763,007
Notes receivables		113,315			460,451
Notes receivable from affiliate		1,863,072			1,863,072
Deferred income taxes		5,995,008			5,208,918
Other assets		1,094,246			798,396
Total assets		$	110,899,261		$	91,635,485
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDER’S DEFICIT:
Current liabilities:
Accounts payable		$	4,842,204		$	5,532,015
Accrued expenses		10,059,005			13,646,352
Book overdrafts		1,389,858			—
Income taxes payable		339,228			342,252
Notes payable, current portion		523,495			625,572
Borrowings under lines of credit		6,128,519			2,978,168
Total current liabilities		23,282,309			23,124,359
Notes payable		3,395,139			2,769,566
Environmental reserve		3,241,144			3,177,015
Deferred income taxes		6,669,024			5,899,112
Deferred warranty revenue		2,516,229			2,643,401
Deferred compensation		903,114			1,358,624
Series B Senior notes		81,250,000			81,250,000
Total liabilities		121,256,959			120,222,077
Commitments and contingencies (Note 7)
Redeemable convertible preferred stock		2,082,773			2,264,000
Shareholders’ deficit:
Common stock		4,691,080			4,691,080
Additional paid-in capital		2,200,968			2,019,741
Cumulative translation adjustment		(1,071,590		)	(926,609		)
Accumulated deficit		(18,260,929		)	(36,634,804		)
Total shareholders’ deficit		(12,440,471		)	(30,850,592		)
Total liabilities, redeemable convertible preferred stock and shareholders’ deficit		$	110,899,261		$	91,635,485

 

The accompanying notes are an integral part of these consolidated financial statements.

 

38

 

HENRY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Years ended December 31,
		2000			2001			2002
Net sales		$	191,513,230		$	191,848,192		$	200,806,828
Cost of sales		143,266,156			138,473,331			138,254,390
Gross profit		48,247,074			53,374,861			62,552,438
Operating expenses:
Selling, general and administrative		46,594,828			47,384,647			51,121,932
Restructuring charges		735,127			568,808			—
Amortization of intangibles		2,549,805			2,524,859			742,529
Operating income (loss)		(1,632,686		)	2,896,547			10,687,977
Other expense (income):
Interest expense		9,889,325			10,059,608			9,695,926
Interest and other income, net		(260,524		)	(191,023		)	(107,321		)
Income (loss) before benefit for income taxes and change in accounting principle		(11,261,487		)	(6,972,038		)	1,099,372
Benefit for income taxes		(4,595,913		)	(1,633,806		)	(212,808		)
Income (loss) before cumulative effect of change in accounting principle		(6,665,574		)	(5,338,232		)	1,312,180
Cumulative effect of change in accounting principle		—			—			(19,686,055		)
Net loss		$	(6,665,574	)	$	(5,338,232	)	$	(18,373,875	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

39

 

HENRY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002

 

							Additional Paid-In Capital			Cumulative Translation Adjustment			Accumulated Deficit			Total Shareholder’s Equity (Deficit)
		Common Stock
		Issued Shares		Amount
Balances, December 31, 1999		227,500		$	4,691,080		$	2,519,147		$	(149,083	)	$	(6,257,123	)	$	804,021
Accretion on redeemable  convertible preferred stock		—		—			(154,839		)	—			—			(154,839		)
Comprehensive loss:
Net loss		—		—			—			—			(6,665,574		)	(6,665,574		)
Other comprehensive  loss:
Change in cumulative  translation adjustment		—		—			—			(348,145		)	—			(348,145		)
Total comprehensive loss		—		—			—			—			—			(7,013,719		)
Balances, December 31, 2000		227,500		4,691,080			2,364,308			(497,228		)	(12,922,697		)	(6,364,537		)
Accretion on redeemable convertible preferred stock		—		—			(163,340		)	—			—			(163,340		)
Comprehensive loss:
Net loss		—		—			—			—			(5,338,232		)	(5,338,232		)
Other comprehensive loss:
Change in cumulative  translation adjustment		—		—			—			(574,362		)	—			(574,362		)
Total comprehensive  loss		—		—			—			—			—			(5,912,594		)
Balances, December 31, 2001		227,500		4,691,080			2,200,968			(1,071,590		)	(18,260,929		)	(12,440,471		)
Accretion on redeemable convertible preferred stock		—		—			(181,227		)	—			—			(181,227		)
Comprehensive loss:
Net loss		—		—			—			—			(18,373,875		)	(18,373,875		)
Other comprehensive income (loss):
Change in cumulative  translation adjustment		—		—			—			144,981			—			144,981
Total comprehensive loss		—		—			—			—			—			(18,228,894		)
Balances, December 31, 2002		227,500		$	4,691,080		$	2,019,741		$	(926,609	)	$	(36,634,804	)	$	(30,850,592	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

40

 

HENRY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Years ended December 31,
		2000			2001			2002
Cash flows from operating activities:
Net loss		$	(6,665,574	)	$	(5,338,232	)	$	(18,373,875	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		5,041,093			4,789,789			4,482,572
Provision for doubtful accounts		1,016,333			716,433			(430,397		)
Deferred income taxes		(5,166,097		)	(649,096		)	(218,961		)
Noncompetition and other intangibles amortization		2,549,805			2,524,859			742,529
Cumulative effect of change in accounting principle		—			—			19,686,055
Loss (gain) on disposal of property and equipment		240,205			(7,391		)	(84,388		)
Gain on sale of investment		(86,542		)	—			—
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable		(4,919,876		)	893,205			(4,017,155		)
Inventories		(2,406,346		)	4,752,248			(2,648,759		)
Receivables from affiliates		20,302			647,763			1,194,785
Notes receivable		(41,875		)	879,383			66,569
Other assets		482,112			(769,972		)	(575,152		)
Income tax receivable		243,183			(2,282,601		)	1,671,017
Accounts payable and accrued expenses		(3,209		)	148,176			4,216,053
Deferred warranty revenue		(284,410		)	237,408			127,172
Deferred compensation		(133,165		)	(34,794		)	455,510
Net cash provided by (used in) operating activities		(10,114,061		)	6,507,178			6,293,575
Cash flows from investing activities:
Capital expenditures		(3,052,450		)	(1,358,006		)	(2,206,149		)
Proceeds from the disposal of property and equipment		40,217			32,301			124,487
Proceeds from sale of investment		204,423			—			—
Investment in affiliate		7,080			—			—
Net cash used in investing activities		(2,800,730		)	(1,325,705		)	(2,081,662		)
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreements		10,824,257			(7,325,575		)	(3,150,351		)
Repayments under note payable agreements		(124,994		)	(97,580		)	(623,496		)
Borrowings under notes payable agreements		—			3,500,000			100,000
Increase (decrease) in book overdrafts		3,402,153			(3,126,421		)	(1,389,858		)
Cash surrender value of life insurance		(746,996		)	1,489,417			1,379,763
Purchase of Series B Senior Notes		—			(150,000		)	—
Net cash provided by (used in) financing activities		13,354,420			(5,710,159		)	(3,683,942		)
Effect of exchange rate changes on cash and cash equivalents		(78,558		)	(91,734		)	59,436
Net increase (decrease) in cash and cash equivalents		361,071			(620,420		)	587,407
Cash and cash equivalents, beginning of year		685,044			1,046,115			425,695
Cash and cash equivalents, end of year		$	1,046,115		$	425,695		$	1,013,102

 

The accompanying notes are an integral part of these consolidated financial statements.

 

41

 

HENRY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The Henry Company (the “Company”) develops, manufactures and markets materials for the construction industry focusing primarily on roofing, sealing and paving applications. The Company’s products include: roof/driveway coatings and paving products, industrial emulsions, air barriers, specialty products, polyurethane foam for residential and commercial uses, and sealants for the construction and marine industries.

 

The consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

Revenue Recognition

 

Revenues are recognized when product is shipped and title transfers. The Company has established programs, which, under specified conditions, allow customers to return products. The Company establishes liabilities for estimated returns and allowances at the time of shipment. In addition, accruals for customer discounts and allowances are recorded when revenues are recognized.

 

The Company also offers its customers an optional separately purchased warranty program for its commercial roofing systems. Revenue from the warranty program is recognized over the warranty periods that range from 5 to 20 years. Warranty repair expenses under the program are charged to expense as incurred.  A reconciliation of extended warranty programs is as follows:

 

		For the year ended December 31,
		2001			2002
		Dollar Amount of Deferred Warranty Revenue			Dollar Amount of Deferred Warranty Revenue
		Debit/(Credit)			Debit/(Credit)
Balance at the beginning of the period		$	(2,278,821	)	$	(2,516,229	)
Warranties issued during the period		(503,075		)	(477,672		)
Costs incurred during the period		(235,355		)	(310,713		)
Settlements made during the period		235,355			310,713
Amortization of deferred revenue		265,667			350,500
Balance at the end of the period		$	(2,516,229	)	$	(2,643,401	)

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

Under the Company’s cash management system, checks issued but not presented to banks frequently result in overdraft balances for accounting purposes and are included in “book overdrafts” in the accompanying balance sheet. At December 31, 2001, and 2002 these overdraft balances amounted to $1,389,858 and $0, respectively.

 

Inventories

 

Inventories are valued at the lower of cost (first-in, first-out) or market. Cost is determined using standard cost that approximates actual costs on a first-in, first-out method.

 

42

 

Property and Equipment

 

Property and equipment are stated at cost. Leasehold improvements are amortized on a straight-line basis over the remaining lease term, or the asset’s estimated useful life, whichever is shorter. All other depreciable assets are depreciated using the double-declining-balance method or the straight-line method, over the assets’ estimated useful lives.  Management evaluates the recoverability of long-lived assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 adopted on January 1, 2002 as discussed below in “Recently Issued Accounting Standards.”  These standards generally require the Company to assess these assets for recoverability when events or circumstances indicate a potential impairment by estimating the undiscounted cash flow to be generated from the use and ultimate disposition of these assets.

 

Depreciation periods are as follows:

 

Buildings		20 to 40 years
Machinery and equipment		6 years
Office furniture and equipment		5 years
Automotive equipment		3 to 5 years
Leasehold improvements		Primary term of lease
Other assets		5 years

 

Additions, major renewals and betterments are capitalized. Repair and maintenance costs are expensed as incurred. Upon sale or retirement of property and equipment, the cost and accumulated depreciation are removed from the appropriate accounts and any corresponding gain or loss is included in income in the year the asset is disposed.

 

Intangibles

 

The Company adopted SFAS No. 142 effective at the beginning of fiscal 2002 and as a result, the Company ceased amortization of goodwill as of that date and reclassified intangible assets acquired prior to July 1, 2001 that did not meet the criteria for recognition under SFAS No. 141.  SFAS No. 142 also changed the method for assessing goodwill impairments from an undiscounted cash flow method prescribed by SFAS No. 121 to a fair market value approach.  Additionally, the initial application of this statement resulted in an impairment of goodwill of approximate $19.7 million primarily related to goodwill from the Monsey Bakor acquisition.  The amount of the impairment was estimated based on an independent valuation process that estimated the present value of the separate future cash flows of the U.S. and Canadian operations and was reported as a cumulative effect of change in accounting principle during 2002.  Changes in the net carrying amount of goodwill for the year-ended December 31, 2002, are as follows:

 

		Building Products Division			Resin Technology Division		Total
Balance as of December 31, 2001		$	19,652,989		—		$	19,652,989
Translation adjustments			33,066		—			33,066
Impairment charges		(19,686,055		)	—		(19,686,055		)
Balance as of December 31, 2002		—			—		—

 

43

 

The following table sets forth the Company’s acquired intangible assets, which will continue to be amortized, for the periods ended December 31, 2001 and December 31, 2002:

 

		December 31, 2001									December 31, 2002
		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Amortizing identifiable intangible assets:
Noncompetition agreements		$	4,727,199		$	1,937,142		$	2,790,057		$	4,727,199		$	2,414,860		$	2,312,339
Financing fees		2,442,000			912,158			1,529,842			2,442,000			1,153,712			1,288,288
Tradenames and trademarks		297,283			111,646			185,637			297,283			134,903			162,380
		$	7,466,482		$	2,960,946		$	4,505,536		$	7,466,482		$	3,703,475		$	3,763,007

 

Amortization expense on acquired intangible assets was $768,767, $749,615 and $742,529 for the years ended December 31, 2000, 2001 and 2002, respectively.  Amortization expense on goodwill was $1,781,038 and $1,775,244 for years ended December 31, 2000 and 2001, respectively.  The weighted-average amortization periods for identifiable intangible assets were 11 years for noncompetition agreements, 10 years for financing fees and 13 years for tradenames and trademarks.  Based on current information, estimated amortization expense for acquired intangible assets for each of the five succeeding fiscal years, starting 2003, is expected to be $742,529, $742,529, $681,416, $650,861 and $650,861, respectively.

 

As required by SFAS No. 142, the results for the prior years ended December 31, 2000 and 2001 have not been restated.  Had the Company been accounting for its goodwill under SFAS No. 142 for all periods presented, the Company’s net loss would have been as follows:

 

		For the Year Ended December 31,
		2000			2001			2002
Reported net loss		$	(6,665,574	)	$	(5,338,232	)	$	(18,373,875	)
Goodwill amortization, net of tax		1,781,038			1,775,244			—
Adjusted net loss		$	(4,884,536	)	$	(3,562,988	)	$	(18,373,875	)

 

Income Taxes

 

The Company recognizes deferred taxes in accordance with the liability method of accounting for income taxes. Under this method, deferred taxes are determined based on the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.  Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.  In assessing the need for a valuation allowance management considers estimates of future taxable income and ongoing prudent and feasible tax planning strategies.  The provision for income taxes represents income taxes payable for the period and the change during the  period in deferred tax assets and liabilities

 

Environmental Reserve

 

The Company’s Kimberton facility was formerly occupied by a pharmaceutical manufacturer whose operations resulted in groundwater contamination identified on the site and surrounding area. The contaminant of concern was trichloroethylene which required various remedial activities, including the provision of alternate water supplies to users in the surrounding area and a groundwater treatment program. Remedial work is being completed under a consent decree the EPA

 

44

 

negotiated in 1990 with the pharmaceutical manufacturer and the Company and a confidential cost sharing agreement between these two companies. The Company’s costs under the consent decree in 2000, 2001 and 2002 were approximately $73,000, $60,000 and $64,000, respectively, and are not expected to be significantly different during 2003 and 2004. The Company has a liability recorded for the entire expected costs of the remedial work over the remaining term of the consent decree and cost-sharing agreement. Costs paid under the consent decree and cost-sharing agreement of $64,000 in 2002 reduced the liability to $3.2 million at December 31, 2002.

 

The Company is currently closing certain of its underground storage tanks. The Company estimates that the capital expenditures required to comply with various regulatory programs in 2003 will not have a material adverse effect on the Company’s earnings, cash flows or competitive position. Such estimates, however, are based on factors and assumptions that are subject to change, including potential modifications of regulatory requirements, detection of unanticipated environmental conditions or other currently unexpected circumstances.

 

The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or as circumstances change. Any costs for future expenditures for environmental remediation obligations are not discounted.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses include all costs associated with marketing and distributing the Company’s products. Distribution costs were $9,604,960, $9,011,277, and $10,669,031 for the years ended December 31, 2000, 2001 and 2002, respectively.  Also included in selling, general and administrative expenses are research and development costs. Research and development costs incurred in developing and improving product formulas are charged to expense in the year incurred. Total research and development costs were $1,545,855, $1,388,156, and $1,490,506 for the years ended December 31, 2000, 2001 and 2002, respectively.

 

Advertising and Promotion Costs

 

All costs associated with advertising and promoting products are expensed in the year incurred and are included in selling, general and administrative expenses. Advertising and promotion expenses were $2,776,309, $2,082,145, and $2,078,364 for the years ended December 31, 2000, 2001 and 2002, respectively.

 

Foreign Currency Translation

 

The assets and liabilities of the Company’s wholly-owned Canadian subsidiaries are translated from Canadian dollars to U.S. dollars using exchange rates in effect at the balance sheet date. Revenues and expenses are translated using average exchange rates prevailing during the period. The effect of the unrealized exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are accumulated as a separate component of shareholders’ equity. Gains and losses resulting from foreign currency transactions are included in operations.  For the years ended December 31, 2000, 2001 and 2002, the aggregate foreign exchange gains (losses) included in operations were $(31,050), $(233,383) and $76,775, respectively.

 

Financial Instruments and Risk Management

 

Financial instruments, which potentially expose the Company to concentration of credit risk, consist primarily of cash and cash equivalents and trade receivables. The Company currently maintains substantially all of its day-to-day operating cash balances with major financial institutions. At times, cash balances may be in excess of Federal Depository Insurance Corporation (“FDIC”) insurance limits. Cash equivalents principally consist of money market funds on deposit with major financial institutions.

 

45

 

Dependence on Key Customer

 

The Company is substantially dependent on Home Depot, the Company’s largest customer.  Home Depot represented approximately 11.4% of gross sales in fiscal year 2000, 13.3% of gross sales in fiscal year 2001 and 25.9% of gross sales in fiscal year 2002 and also accounted for approximately 23.3% and 40.0% of  accounts receivable at December 31, 2001 and 2002, respectively.  In January 2002, the company entered into a three-year agreement with Home Depot that significantly expands the Company’s relationship with Home Depot.  The agreement contains performance targets, which, if not achieved, could trigger a payment from the Company to Home Depot in 2005.  In the first quarter of 2002, the Company’s relationship with Lowes, its second largest customer, was terminated.  In 2002, the incremental revenue resulting from the Home Depot agreement exceeded the revenue lost as a result of the loss of Lowes as a customer. Any deterioration of the Company’s relationship with Home Depot or any failure of Home Depot to purchase and pay for product shipped by the Company to Home Depot could have a material adverse effect on the Company.

 

The Value of Financial Instruments

 

SFAS No. 107, “Disclosure About Fair Value of Financial Instruments”, requires disclosure of fair value information about most financial instruments both on and off the balance sheet, if it is practicable to estimate. SFAS No. 107 excludes certain financial instruments such as certain insurance contracts and all non-financial instruments from its disclosure requirements. A financial instrument is defined as a contractual obligation that ultimately ends with the delivery of cash or an ownership interest in an entity. Disclosures regarding the fair value of financial instruments are derived using external market sources, estimates using present value or other valuation techniques. Cash, accounts receivable, accounts payable, accrued liabilities and short-term debt are reflected in the financial statements at fair value because of the short-term maturity of these instruments. The Company’s long-term debt is primarily comprised of Senior Notes with a carrying value of $81.3 million at December 31, 2002. The reported fair value of the Senior Notes was $52.8 million at December 31, 2002.

 

The Company has issued a standby letter of credit relating to its business insurance and is contingently liable for approximately $1,141,207. The standby letter of credit is in force for the term of the insurance policy, and reflects the current fair value.

 

Use of Estimates and Assumptions

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassifications

 

Certain previously reported amounts have been reclassified to conform with the current year’s presentation.

 

Comprehensive Income (Loss)

 

During 1998, the Company adopted the provisions of SFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130 establishes guidelines for the reporting and display of comprehensive income and its components in the financial statements.

 

Comprehensive income (loss) as defined, includes all changes in shareholders’ equity during a period from non-owner sources. The only component of comprehensive loss not included in the Company’s operating results relates to the change in the cumulative translation adjustment related to the foreign currency effects of the Canadian operations acquired during 1998 as part of the Monsey Bakor acquisition as discussed in Note 2.

 

46

 

Recently Issued Accounting Pronouncements

 

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) Nos. 141 and 142 (“SFAS No. 141” and “SFAS No. 142”), “Business Combinations” and “Goodwill and Other Intangible Assets”.   SFAS No. 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under SFAS No. 142, goodwill is tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. SFAS No. 141 and SFAS No. 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of SFAS No. 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 ceased, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under SFAS No. 141 were reclassified to goodwill. The Company adopted SFAS No. 142 on January 1, 2002 and completed its goodwill impairment test during the second quarter of 2002.  Based on the results of the impairment test, the Company recorded a cumulative effect of change in accounting principle transitional impairment of approximately $19.7 million in 2002.

 

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.  All provisions of this Statement will be effective at the beginning of fiscal year 2003.  The Company is in the process of determining the impact of this Statement on the Company’s financial statements.

 

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  This Statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” and amends APB Opinion No. 30, “Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.”  This Statement requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less costs to sell.  SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale.  This Statement also retains APB Opinion No. 30’s requirement that companies report discontinued operations separately from continuing operations.  All provisions of this Statement were effective in the first quarter of fiscal year 2002.  The adoption of this standard did not have a significant impact on the Company’s financial position, results of operations, or cash flows.

 

In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.”  This Statement rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.”  This Statement amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions.  This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions.  The provisions of this Statement related to the rescission of Statement No.4 are effective beginning in fiscal year 2003.  All other provisions were effective after May 15, 2002.  The provisions adopted on May 15, 2002 did not have a significant impact on the Company’s financial results.  The Company is in the process of determining the impact of this Statement on the Company’s financial results for those provisions effective in fiscal year 2003.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities.” SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in the EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”  The scope of SFAS No. 146 also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract.  SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 with earlier adoption encouraged.  The Company does not anticipate that the adoption of SFAS No. 146 will have a significant impact on the Company’s financial position, results of operations, or cash flows.

 

47

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”  This Interpretation clarifies the requirements for a guarantor’s accounting for and disclosures of certain guarantees issued and outstanding.  This Interpretation also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations the guarantor has undertaken in issuing that guarantee.  The disclosure provisions of the Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002.  The Company has adopted the disclosure provisions of this Interpretation as disclosed in Note 1 and Note 5 to the consolidated financial statements. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.  The Company is currently in the process of determining the impact of this Interpretation on the Company’s financial results for those provisions effective in 2003.

 

The Company is currently reviewing the requirements of EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities.  Specifically, EITF Issue No. 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting.  The provisions of EITF Issue No. 00-21 will be effective in fiscal periods beginning after June 15, 2003.  The Company is in the process of determining the impact of EITF Issue No. 00-21 on the Company’s financial results when effective.

 

2. BUSINESS ACQUISITION AND NOTE OFFERING:

 

On April 22, 1998, the Company completed the acquisition of Monsey Bakor and its subsidiaries, which are engaged in the distribution and manufacture of roof coatings, adhesives and membranes, and waterproofing and air barrier systems, for residential and commercial applications. The cash purchase price was $42,750,000 with an additional $3,227,000 paid at closing to certain selling shareholders of Monsey Bakor for noncompetition agreements. A selling shareholder also purchased 22,500 shares of redeemable convertible preferred stock of the Company for $600,000 in cash as more fully discussed in Note 12. The acquisition was accounted for using the purchase method of accounting.

 

Concurrent with the Monsey Bakor acquisition, the Company conducted a senior note offering (the “Offering”) in the aggregate principal amount of $85,000,000 as more fully discussed in Note 5.

 

3. INVENTORIES:

 

Inventories consist of the following:

 

		December 31,
		2001			2002
Raw materials		$	6,811,265		$	8,123,137
Finished goods		6,699,585			8,036,472
Total gross inventory		13,510,850			16,159,609
Reserve for slow moving inventory		(250,000		)	(250,000		)
		$	13,260,850		$	15,909,609

 

48

 

4. PROPERTY AND EQUIPMENT, NET:

 

Property and equipment consist of the following:

 

		December 31,
		2001			2002
Buildings		$	14,707,437		$	14,478,008
Machinery and equipment		27,935,954			29,024,564
Office furniture and equipment		8,204,948			8,713,856
Automotive equipment		1,207,485			1,087,381
Leasehold improvements		2,938,283			3,003,151
Other assets		486,535			510,346
		55,480,642			56,817,306
Less, accumulated depreciation and amortization		(29,025,424		)	(32,965,029		)
		26,455,218			23,852,277
Land		3,219,585			3,180,755
Construction-in-progress		602,057			579,785
		$	30,276,860		$	27,612,817

 

5. LONG–TERM DEBT AND CREDIT FACILITIES:

 

On April 22, 1998, the Company privately issued and sold $85,000,000 of senior notes (the “Senior Notes”) due in 2008. Interest on the Senior Notes is payable semi–annually at 10% per annum. In October 1998, the Company completed an exchange offer for all of the Senior Notes with identical terms in all material respects to the original private issue. The proceeds from the offering were used to (i) retire existing Company bank debt, (ii) retire existing Company subordinated shareholder debt, (iii) acquire Monsey Bakor, (iv) retire a substantial portion of Monsey Bakor’s then-existing bank debt with (v) the remainder providing additional working capital.

 

Long-term debt and credit facilities consist of the following:

 

		December 31,
		2001			2002
10.0% Series B Senior Notes due April 2008		$	81,250,000		$	81,250,000
Line of credit borrowings, at the bank’s prime interest rate (4.75% at December 31, 2001 4.25% at December 31, 2002)		6,003,444			2,978,168
Canadian bank line of credit borrowings, interest rate charged at prime plus 0.5% (4.5% at December 31, 2001)		125,075			—
Term note payable to third party, with interest at 8.5% at December 31, 2001 and 2002, principal and interest payable monthly in installments of $4,848, due in fiscal year 2007		418,634			395,138
Term note payable to bank, with interest at 4.75% at December 31, 2001 and 4.25% at December 31, 2002, principal payable monthly in installments of $50,000 beginning March 2002		3,500,000			3,000,000
		91,297,153			87,623,306
Less, current maturities		(6,652,014		)	(3,603,740		)
		$	84,645,139		$	84,019,566

 

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The Company’s Senior Notes are guaranteed by the Company’s United States subsidiary, Kimberton Enterprises, Inc. The guarantee obligations of the Subsidiary Guarantor are full, unconditional and joint and several. See Note 15 for the Guarantor Condensed Consolidating Financial Statements. The notes payable agreement limits the Company’s ability to make dividend payments and incur additional debt.

 

In 1999, the Company repurchased and retired $3.6 million of the Senior Notes which resulted in a gain of $0.6 million, net of income taxes. In 2001, the Company repurchased and retired $150,000 of the Senior Notes at face value which resulted in no gain or loss.  The bond indenture includes, among other restrictions, certain restrictions on the incurrence of additional debt.

 

In August 2001, the Company entered into a replacement credit facility agreement with two new financial institutions and received funding. The replacement credit facility provides for a $25 million revolving credit facility and a $10 million term loan. Upon closing, $3.5 million of the term loan was funded. The replacement facility expires in August 2006 and is collateralized by substantially all of the Company’s United States assets. Balances outstanding under the revolving line of credit and the term loan were $3.0 million each at December 31, 2002.  The remaining availability of credit under the revolver was $11.5 million at December 31, 2002. Term loan and line of credit borrowings both bear interest at the prime rate with an option to borrow based on the LIBOR rate.

 

The Company also maintains a credit line with a Canadian bank.  There was no balance outstanding under this line at December 31, 2002. Availability under this facility at December 31, 2002 was $3.5 million. There are certain financial covenants associated with this credit line, including minimum interest coverage and working capital ratios, and maximum tangible net worth and debt to net worth measures.  The Company was in compliance with all debt covenants as of year end.

 

The following are future maturities of long–term debt and credit facilities for each of the next five years ending December 31 and total thereafter:

 

2003		$	3,603,740
2004		627,833
2005		630,293
2006		632,970
2007		878,470
Thereafter		81,250,000
Total		$	87,623,306

 

The fair value of the Company’s debt is calculated based on the estimated market value of the Senior Notes and the discounted amount of future cash flows of the remaining debt obligations using the current rates offered to the Company for debts of the same remaining maturities and market values.  At year end 2001 and 2002, the estimated fair value of the Company’s total debt, including short term borrowings, was $47.2 million and $62.5 million, respectively.

 

6. INCOME TAXES:

 

The significant components of the benefit for income taxes for the years ended December 31, 2000, 2001 and 2002 are as follows:

 

		2000			2001			2002
Current:
State		—			—			$	269,780
Foreign		$	650,918		$	(770,293	)		376,184
		650,918			(770,293		)	645,964
Deferred:
Federal		(4,754,626		)	(485,238		)	(656,760		)
State		(271,295		)	(378,275		)	(202,012		)
Foreign		(220,910		)	—			—
		(5,246,831		)	(863,513		)	(858,772		)
		$	(4,595,913	)	$	(1,633,806	)	$	(212,808	)

 

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The Company’s effective tax rate differs from the federal statutory tax rate for the years ended December 31, 2000, 2001 and 2002 as follows:

 

		2000		2001		2002
Provision for income taxes at the federal statutory tax rate		(34	)%	(34	)%	(34	)%
State taxes net of federal tax benefit		(3	)	(3	)	(6	)
Foreign income taxes in excess of U.S. statutory rate		1		3		—
Prior year net operating loss adjustment		(8	)	8		(4	)
Nondeductible intangibles		5		8		44
Nondeductible life insurance		1		(1	)	—
Nondeductible business expenses		—		1		—
Other, net		(3	)	(5	)	(1	)
		(41	)%	(23	)%	(1	)%

 

The Company’s Canadian operation’s income (loss) before income taxes, net of cumulative change in accounting principle, was ($1,499,096), $1,704,589 and ($1,272,779) for the years ended December 31, 2000, 2001 and 2002, respectively.

 

The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2001 and 2002 are as follows:

 

		2001			2002
Deferred tax assets:
Environmental reserve		$	1,388,506		$	1,361,033
Allowances and reserves deductible in the future		1,091,955			1,138,867
Inventory capitalization		87,978			101,937
Deferred revenue		999,217			1,016,363
Net operating loss		3,040,340			1,618,212
Other accruals		528,139			1,348,772
Deferred tax assets		7,136,135			6,585,184
Deferred tax liabilities:
Depreciation		(1,565,609		)	(975,978		)
Deferred gain on discharge of liability		(1,582,985		)	(1,614,842		)
Amortization of acquired intangibles and asset step-up		(3,520,430		)	(3,256,536		)
State tax benefit		—			(51,756		)
Deferred tax liabilities		(6,669,024		)	(5,899,112		)
Net deferred tax assets		$	467,111		$	686,072

 

7. COMMITMENTS AND CONTINGENCIES:

 

The Company conducts certain operations out of leased facilities, including the corporate office and divisional warehouses. The lease terms range from 1 to 6 years and begin to expire in 2002. Certain of the Company’s operating lease agreements provide for escalation of payments, which are based on fluctuations of certain published cost-of-living indices. The Company also leases certain land, buildings and equipment from related parties. The various leases also contain certain renewal options.

 

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Total rent expense was, $1,721,660, $1,722,051 and $1,991,379 for the years ended December 31, 2000, 2001 and 2002, respectively. Included in rent expense is rent paid to related parties of $771,433, $789,543 and $760,772 for the years ended December 31, 2000, 2001 and 2002, respectively The minimum rental commitments for land, buildings and equipment under all noncancelable operating leases, with lease terms in excess of one year, are as follows:

 

2003		$	1,363,399
2004		817,575
2005		581,507
2006		470,982
2007		273,660
Thereafter		2,205,109
		$	5,712,232

 

Included in the annual minimum rental commitments are operating lease payments due to related parties of $734,851 in 2003, $433,693 in 2004, $424,904  in 2005, $404,024 in 2006, $264,613 in 2007 and $2,205,109 thereafter.

 

The Company is involved in various lawsuits, claims and inquiries, most of which are routine to the nature of its business. In the opinion of management, the resolution of these matters will not materially affect the financial position, results of operations or cash flows of the Company.

 

8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

		2000			2001			2002
Cash paid during the year for:
Interest		$	9,617,073		$	9,768,530		$	8,877,162
Income taxes paid		889,820			785,574			256,989
Income taxes recovered		—			—			(1,925,358		)
Non-cash transactions:
Note receivable from sale of assets		123,000			—			400,000
Note receivable forgiven		—			501,000			—
Note receivable exchanged for interest in Executive Deferred Plan		—			253,544			—

 

9. PROFIT-SHARING AND PENSION PLAN:

 

The Company sponsors a deferred qualified profit–sharing plan with a 401(k) feature covering salaried and hourly employees of Henry Company and its affiliates, other than union employees, who have completed six months of service. Contributions made to the profit–sharing plan by the Company are based on the Company’s performance and are at the discretion of the Board of Directors.  The Company has not made any contributions to the profit-sharing plan during the years 2000 through 2002. In 2000 and 2001, participants in the 401(k) Plan were permitted to contribute up to 15% of their annual compensation to the 401(k) Plan through salary deferral up to a maximum of $10,500 of a participant’s annual compensation.  Commencing in 2002, participants may contribute up to 60% of their annual compensation up to a maximum $11,000; additionally participants over age 50 may make catch-up contributions up to maximum $1,000.  In 1999, the 401(k) plan was amended to include a discretionary Company matching contribution to eligible participants.  For 2000, 2001, and 2002, participant contributions were matched at the rate of $.50 for each dollar up to 4% of the participants’ compensation. Total Company matching contributions for years ending December 31, 2000, 2001 and 2002 were $211,698, $165,314, and $249,581, respectively.

 

Hourly employees at the Huntington Park, Kimberton and Rock Hill facilities are covered by multi-employer union plans to which the Company makes periodic contributions as determined by collective bargaining agreements. The Company is also subject to additional charges as determined by the plans’ trustees during the term of the agreement to maintain the current level of health and welfare benefits. The information with respect to the plans’ net assets and actuarial present value of

 

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accumulated plan benefits are not determinable due to the nature of the plans.   Prior to 2002, eligible U.S. hourly employees at the other non-union facilities participated in a noncontributory defined pension plan.  Company contributions were based upon predetermined hourly rates.  The combined costs incurred for both plans during the years ended December 31, 2000, 2001 and 2002 were $313,905, $396,912, $151,018, respectively.  Beginning in 2002, the non-union hourly employees became participants in the deferred qualified profit-sharing plan with 401(k) feature noted above.

 

 

10. RELATED PARTIES:

 

The Company leases its Huntington Park headquarters from a family trust and living trust for which Warner W. Henry is the trustee pursuant to three separate real property leases. These leases expire in 2006 and 2016. The total rent paid in 2002 and 2001 for the Huntington Park leases was approximately $424,900 each year.  The Company believes that the rent paid under the above leases represent substantially fair market value and that the other terms and conditions of the leases are commercially reasonable.

 

The Company leased additional property at its Huntington Park headquarters from Alamo Development Company until February, 2003 at which time it purchased the property for $773,362.  In 2002, the Company paid rent of $39,791 pursuant to this lease which was subject to annual adjustments to reflect changes in the Bank of America prime rate. Frederick H. Muhs, a director of the Company, is a shareholder of Alamo Development Company along with certain other members of his family. At the same time as the purchase of the Huntington Park property, the Company sold property located in Kimberton, Pennsylvania to Alamo Development Company for $750,000.  At one time this property was utilized by the Company for its own operations, but more recently it has been leased to two separate third parties for their own use. The Company believes that both the purchase of the Huntington Park property and the sale of the Kimberton property were completed at their fair market value.

 

Henry Company performs certain administrative services for an affiliate, Henry II Company a California corporation, pursuant to an administrative services agreement that provides for payments from Henry II Company to Henry Company for such services. These payments totaled $0.8 million in 2000 and 2001, and $0.4 million in 2002. The administrative services fee was reduced in 2002 as certain administrative functions were no longer performed by the Company for Henry II.   Henry II Company’s shareholders are Warner W. Henry, Carol Henry, and certain trusts for the benefit of their children.

 

At December 31, 1997, Henry Compny received a note from Henry II Company for $1.9 million representing the purchase price for its interest in certain real property. Such real property related solely to the business of Henry II, Inc. and had a net book value of $1.9 million. The note bears interest at the prime rate, and is repayable in a lump sum at any time up to December 31, 2003. The principal balance of such note was $1.9 million at December 31, 2001 and 2002.

 

In addition, at December 31, 2002, Henry II Company owed $0.3 million to Henry Company, representing past advances made on behalf of Henry II, Inc. The note evidencing this debt does not bear interest and is payable upon demand.

 

Joseph T. Mooney, Jr. is a Director and also an employee of the Company and receives an annual salary.  Mr. Mooney recieved $180,250 in salary and bonus for each of fiscal years 2002 and 2001, and $236,672 for fiscal year 2000.

 

Henry Company receives business and financial consulting services from The Muhs Company, Inc., of which Frederick H. Muhs, a director of the Company, is the President and controlling shareholder. Henry Company paid $75,000 for these services in 2000 and 2001 and $100,000 in 2002. See “Executive Compensation.”

 

Paul H. Beemer is compensated for consulting advisory services pursuant to a consulting agreement with the Company with compensation established at $100,000 per year. The consulting agreement contains a noncompetition clause restricting Mr. Beemer’s employment or service with a business entity that competes with the Company in its present or future marketing areas. Mr. Beemer’s consulting agreement expires on June 30, 2003. In fiscal years 2002, 2001 and 2000, Mr. Beemer received $100,000 in compensation under his consulting agreement.

 

Henry Company receives business and financial consulting services from Terrill M. Gloege, a director of the Company, who is also as the Trustee of the William Warner Henry, Catherine Anne Henry, and Michael Andrew Henry Trusts established under the Henry Trust dated 9/17/93. Henry Company paid $30,000 for these services in 2002 and $10,000 in 2001.

 

In connection with the Monsey Bakor acquisition, the Company sold 22,500 shares of redeemable convertible preferred stock in the Company to Joseph T. Mooney, Jr., a director of the Company, for $600,000. The Company is obligated, upon the exercise of Mr. Mooney’s put option, to redeem the stock for cash in annual amounts of $500,000 beginning in 2004 and

 

53

 

aggregating $3,000,000, or for $3,000,000 upon the death of Mr. Mooney. The shares are convertible into shares of Common Stock.

 

The Company is a party to employment and consulting agreements with certain directors and officers of the Company. See “Executive Compensation-Employment Agreements and Compensation Arrangements.”

 

 

11. CAPITAL STOCK:

 

On April 21, 1998, Warner Development Company of Texas (“Warner Development”) was merged into the Company. The outstanding shares of Warner Development were canceled in the merger. For periods prior to this date, the financial results of the Company and Warner Development were presented on a combined basis as both entities were under common control with identical management and shareholder ownership and interest.

 

In addition, on April 21, 1998, the number of authorized shares of Company Common Stock was increased to 1,000,000 shares.

 

On April 22, 1998, the Company issued 27,500 shares of Common Stock to Frederick Muhs, a director of the Company, for $2,000,000 in cash.

 

As of December 31, 2001 and 2002, common stock is composed of the following:

 

		2001			2002
Henry Company, common stock, no par value, stated value $5 per share, 100,000 shares authorized, issued and outstanding		$	500,000		$	500,000
Henry Company, common stock, no par value, stated value $21.78 per share, 94,000 shares authorized, issued and outstanding		2,047,320			2,047,320
Henry Company, common stock, no par value, stated value $72.73 per share, 27,500 share authorized, issued and outstanding		2,000,000			2,000,000
Henry Company, super voting class A common stock, no par value, stated value $23.96 per share, 6,000 shares authorized, issued and outstanding		143,760			143,760
		$	4,691,080		$	4,691,080

 

On October 1, 1997, Henry Company granted the Warner W. Henry Living Trust warrants to purchase an aggregate of 400,000 shares of Henry Company capital stock, consisting of 12,000 shares of Class A common stock and 388,000 shares of common stock (the “Warrants”). The Warrants expire on September 30, 2012 and may be exercised in whole or in part at variable and increasing exercise prices over the term of the warrants. The current and maximum exercise prices for both Class A common stock and common stock are $15.53 and $38.82 per share, respectively.

 

The warrants have an initial exercise price that exceeds the fair value of the capital stock at the date of grant. The grant date present value of each warrant is estimated at $114 or an aggregate of $44,000 using the Black-Scholes pricing model, using the following assumptions: risk-free interest rate at 6.0%; expected warrant life of 15 years; volatility of 20.0%; forfeiture rate zero (0); no expected dividends; and no adjustments for nontransferability. As of December 31, 2002, no warrants have been exercised.

 

12. REDEEMABLE CONVERTIBLE PREFERRED STOCK:

 

In connection with the Monsey Bakor acquisition, the Company sold 22,500 shares of redeemable convertible preferred stock in the Company to Joseph T. Mooney, Jr. for $600,000. The Company is obligated, upon the exercise of Mr. Mooney’s put option, to redeem the stock for cash in annual amounts of $500,000 beginning in 2004 and aggregating $3,000,000, or for $3,000,000 upon the death of Mr. Mooney. The shares are convertible into shares of Common Stock. The fair value recorded for the issuance of the preferred stock represents the estimated present value of the redemption payments.

 

The carrying amount of the Preferred Stock is being increased by periodic accretions so that the amount reflected in the balance sheet will equal the mandatory redemption amount at the redemption date.

 

54

 

13. RESTRUCTURING CHARGES

 

The Company recorded $735,127 and $568,808 for restructuring charges for years ended December 31, 2000 and 2001, respectively.  The charges pertain to plant closings and the reorganization or elimination of certain administrative and selling functions.  The charges represent severance and other personnel payments as well as other costs related to the plant closures and streamlining of operations associated with the implementation of cost reduction initiatives noted above.  As of December 31, 2002, the restructuring was complete, and therefore no accruals were necessary.

 

14. SEGMENT AND GEOGRAPHIC INFORMATION:

 

During 1999, the Company adopted SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information”, which requires the Company to report information about its operating segments using a management approach.

 

The Company manages its business through two reportable segments, or primary business units with separate management teams, infrastructures, marketing strategies and customers. The Company’s primary business units are: the Henry Building Products Division, which develops, manufactures and markets roof and driveway coatings and paving products, industrial emulsions, air barriers, and specialty products; and the Resin Technology Division, which develops, manufactures and sells polyurethane foam for roofing and commercial uses.

 

The accounting policies of the reportable segments are the same as those described in Note 1 of the Notes to Consolidated Financial Statements. The Company evaluates the performance of its operating segments based on net sales, gross profit and operating income. Intersegment sales and transfers are not significant.

 

Summarized financial information concerning the Company’s reportable segments is shown below.

 

		Henry Building Products Division			Resin Technology Division			Total
2002
Net sales		$	177,453,819		$	23,353,009		$	200,806,828
Gross profit		57,544,293			5,008,145			62,552,438
Operating income		9,766,842			921,135			10,687,977
Depreciation and amortization		5,056,396			168,705			5,225,101
Cumulative effect of change in accounting principle		(19,686,055		)	—			(19,686,055		)
Total assets		76,435,507			15,199,978			91,635,485
Capital expenditures		2,079,395			126,754			2,206,149
2001
Net sales		$	169,715,332		$	22,132,860		$	191,848,192
Gross profit		48,868,768			4,506,093			53,374,861
Operating income		2,116,708			779,839			2,896,547
Depreciation and amortization		7,126,923			187,725			7,314,648
Total assets		97,469,792			13,429,469			110,899,261
Capital expenditures		1,232,511			125,495			1,358,006
2000
Net sales		$	169,479,365		$	22,033,865		$	191,513,230
Gross profit		44,330,136			3,916,938			48,247,074
Operating income (loss)		(2,054,982		)	422,296			(1,632,686		)
Depreciation and amortization		7,424,855			166,043			7,590,898
Total assets		112,346,023			12,941,546			125,287,569
Capital expenditures		2,755,164			297,286			3,052,450

 

55

 

The Company is domiciled in the United States with foreign operations based in Canada.  Summarized geographic data related to the Company’s operations for 2000, 2001 and 2002 are as follows:

 

		Net Sales			Long-Lived Assets
2002
United States		$	166,017,612		$	36,674,077
Canada		34,789,216			5,250,788
Total		$	200,806,828		$	41,924,865
2001
United States		$	158,919,033		$	59,583,273
Canada		32,929,159			7,515,720
Total		$	191,848,192		$	67,098,993
2000
United States		$	158,691,494		$	62,725,434
Canada		32,821,736			8,478,534
Total		$	191,513,230		$	71,203,968

 

15. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS:

 

The Company’s United States subsidiary, Kimberton Enterprises, Inc. (the “Guarantor Subsidiary”) is an unconditional guarantor, on a full, joint and several basis, of the Company’s debt represented by the Senior Notes. The Company’s Canadian subsidiaries are not guarantors of the Senior Notes.

 

Condensed consolidating financial statements of the Guarantor are combined with the Henry Company and are presented below. Separate financial statements of the Guarantor Subsidiary are not presented and the Guarantor Subsidiary is not filing separate reports under the Exchange Act because the Subsidiary Guarantor has fully and unconditionally guaranteed the Senior Notes on a full, joint and several basis under the guarantees and management has determined that separate financial statements and other disclosures concerning the Guarantor Subsidiary are not material to investors.

 

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CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2002

 

		Henry Company (Parent Corporation) and Guarantor Subsidiary			Nonguarantor Subsidiaries			Consolidated Elimination Entries			Consolidated Total
ASSETS:
Current assets:
Cash and cash equivalents		$	232,030		$	781,072		—			$	1,013,102
Accounts receivable, net		25,020,552			3,070,661			—			28,091,213
Inventories, net		11,897,343			4,012,266			—			15,909,609
Receivables from affiliate		5,413,959			2,180,799			$	(7,313,396	)	281,362
Notes receivable		29,144			—			—			29,144
Prepaid expenses and other current assets		2,064,620			199,785			—			2,264,405
Income tax receivable		595,564			149,955			—			745,519
Deferred income taxes		1,298,309			77,957			—			1,376,266
Total current assets		46,551,521			10,472,495			(7,313,396		)	49,710,620
Property and equipment, net		22,362,029			5,250,788			—			27,612,817
Investment in subsidiaries		8,564,729			—			(8,564,729		)	—
Cash surrender value of life insurance, net		2,218,204			—			—			2,218,204
Other intangibles		3,763,007			—			—			3,763,007
Notes receivable		460,451			—			—			460,451
Note receivable from affiliate		1,863,072			—			—			1,863,072
Deferred income taxes		5,208,918			—			—			5,208,918
Other assets		798,396			—			—			798,396
Total assets		$	91,790,327		$	15,723,283		$	(15,878,125	)	$	91,635,485
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY(DEFICIT):
Current liabilities:
Accounts payable		$	4,218,189		$	1,313,826		—			$	5,532,015
Accrued expenses		12,168,592			1,477,760			—			13,646,352
Intercompany payables		2,180,799			5,132,597			$	(7,313,396	)	—
Income taxes payables		—			342,252			—			342,252
Notes payable, current portion		625,572			—			—			625,572
Borrowings under line of credit		2,978,168			—			—			2,978,168
Total current liabilities		22,171,320			8,266,435			(7,313,396		)	23,124,359
Notes payable		2,769,566			—			—			2,769,566
Environmental reserve		3,177,015			—			—			3,177,015
Deferred income taxes		4,284,269			1,614,843			—			5,899,112
Deferred warranty revenue		2,372,460			270,941			—			2,643,401
Deferred compensation		1,358,624			—			—			1,358,624
Senior notes		81,250,000			—			—			81,250,000
Total liabilities		117,383,254			10,152,219			(7,313,396		)	120,222,077
Redeemable convertible preferred stock		2,264,000			—			—			2,264,000
Shareholders’ equity (deficit):
Common stock		4,691,080			7,194,402			(7,194,402		)	4,691,080
Additional paid-in capital		2,019,741			—			—			2,019,741
Cumulative translation adjustment		—			(1,514,609		)	588,000			(926,609		)
Accumulated deficit		(34,567,748		)	(108,729		)	(1,958,327		)	(36,634,804		)
Total shareholders’ equity (deficit)		(27,856,927		)	5,571,064			(8,564,729		)	(30,850,592		)
Total liabilities and shareholders’ equity (deficit)		$	91,790,327		$	15,723,283		$	(15,878,125	)	$	91,635,485

 

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CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2002

 

		Henry Company (Parent Corporation) and Guarantor Subsidiary			Nonguarantor Subsidiaries			Consolidated Elimination Entries			Consolidated Total
Net sales		$	175,851,784		$	34,789,216		$	(9,834,172	)	$	200,806,828
Cost of sales		121,422,697			26,665,865			(9,834,172		)	138,254,390
Gross profit		54,429,087			8,123,351			—			62,552,438
Operating expenses:
Selling, general and administrative		44,168,119			6,953,813			—			51,121,932
Amortization of intangibles		742,529			—			—			742,529
Operating income		9,518,439			1,169,538			—			10,687,977
Other expense (income):
Interest expense		9,496,447			199,479			—			9,695,926
Interest and other income, net		(107,321		)	—			—			(107,321		)
Income before provision  (benefit) for income taxes and change in accounting principle		129,313			970,059			—			1,099,372
Provision (benefit) for income taxes		(588,992		)	376,184			—			(212,808		)
Net income before cumulative effect of change in accounting principle		718,305			593,875			—			1,312,180
Cumulative effect of change in accounting principle		(17,443,217		)	(2,242,838		)	—			(19,686,055		)
Net loss		$	(16,724,912	)	$	(1,648,963	)	—			$	(18,373,875	)

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2002

 

		Henry Company (Parent Corporation) and Guarantor Subsidiary			Nonguarantor Subsidiaries			Consolidated Elimination Entries		Consolidated Total
Net cash provided by operating activities		$	5,378,159		$	915,416		—		$	6,293,575
Cash flows from investing activities:
Capital expenditures		(1,748,745		)	(457,404		)	—		(2,206,149		)
Proceeds from the disposal of property and equipment		120,969			3,518			—		124,487
Net cash used in investing  activities		(1,627,776		)	(453,886		)	—		(2,081,662		)
Cash flows from financing activities:
Net borrowings under line-of-credit agreements		(3,025,276		)	(125,075		)	—		(3,150,351		)
Repayments under notes payable agreements		(623,496		)	—			—		(623,496		)
Borrowings under notes payable agreements		100,000			—			—		100,000
Decrease in book overdraft		(1,389,858		)	—			—		(1,389,858		)
Cash surrender value life insurance		1,379,763			—			—		1,379,763
Net cash used in financing activities		(3,558,867		)	(125,075		)	—		(3,683,942		)
Effect of changes in exchange rate on cash and cash equivalents		—			59,436			—		59,436
Net increase in cash and cash equivalents		191,516			395,891			—		587,407
Cash and cash equivalents, beginning of year		40,514			385,181			—		425,695
Cash and cash equivalents, end of  year		$	232,030		$	781,072		—		$	1,013,102

 

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CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2001

 

		Henry Company (Parent Corporation) and Guarantor Subsidiary			Nonguarantor Subsidiaries			Consolidated Elimination Entries			Consolidated Total
ASSETS:
Current assets:
Cash and cash equivalents		$	40,514		$	385,181		—			$	425,695
Accounts receivable, net		20,424,397			3,219,264			—			23,643,661
Inventories, net		10,352,068			2,908,782			—			13,260,850
Receivables from affiliate		7,309,244			1,264,529			$	(7,097,626	)	1,476,147
Notes receivable		42,849			—			—			42,849
Prepaid expenses and other current assets		1,280,657			112,746			—			1,393,403
Income tax receivable		318,175			2,098,361			—			2,416,536
Deferred income taxes		1,097,153			43,974			—			1,141,127
Total current assets		40,865,057			10,032,837			(7,097,626		)	43,800,268
Property and equipment, net		24,970,912			5,305,948			—			30,276,860
Investment in subsidiaries		8,564,729			—			(8,564,729		)	—
Cash surrender value of life insurance, net		3,597,967			—			—			3,597,967
Intangibles, net		21,948,753			2,209,772			—			24,158,525
Notes receivable		113,315			—			—			113,315
Note receivable from affiliate		1,863,072			—			—			1,863,072
Deferred income taxes		5,995,008			—			—			5,995,008
Other assets		1,094,246			—			—			1,094,246
Total assets		$	109,013,059		$	17,548,557		$	(15,662,355	)	$	110,899,261
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY(DEFICIT):
Current liabilities:
Accounts payable		$	3,663,079		$	1,179,125		—			$	4,842,204
Accrued expenses		8,828,794			1,230,211			—			10,059,005
Book overdrafts		1,389,858			—			—			1,389,858
Intercompany payables		1,264,529			5,833,097			$	(7,097,626	)	—
Income taxes payables		—			339,228			—			339,228
Notes payable, current portion		523,495			—			—			523,495
Borrowings under line of credit		6,003,444			125,075			—			6,128,519
Total current liabilities		21,673,199			8,706,736			(7,097,626		)	23,282,309
Notes payable		3,395,139			—			—			3,395,139
Environmental reserve		3,241,144			—			—			3,241,144
Deferred income taxes		5,086,039			1,582,985			—			6,669,024
Deferred warranty revenue		2,332,439			183,790			—			2,516,229
Deferred compensation		903,114			—			—			903,114
Senior notes		81,250,000			—			—			81,250,000
Total liabilities		117,881,074			10,473,511			(7,097,626		)	121,256,959
Redeemable convertible preferred stock		2,082,773			—			—			2,082,773
Shareholders’ equity (deficit):
Common stock		4,691,080			7,194,402			(7,194,402		)	4,691,080
Additional paid-in capital		2,200,968			—			—			2,200,968
Cumulative translation adjustment		—			(1,659,590		)	588,000			(1,071,590		)
Accumulated (deficit) retained earnings		(17,842,836		)	1,540,234			(1,958,327		)	(18,260,929		)
Total shareholders’ equity (deficit)		(10,950,788		)	7,075,046			(8,564,729		)	(12,440,471		)
Total liabilities and shareholders’ equity (deficit)		$	109,013,059		$	17,548,557		$	(15,662,355	)	$	110,899,261

 

60

 

CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2001

 

		Henry Company (Parent Corporation) and Guarantor Subsidiary			Nonguarantor Subsidiaries			Consolidated Elimination Entries			Consolidated Total
Net sales		$	167,300,883		$	32,929,159		$	(8,381,850	)	$	191,848,192
Cost of sales		121,629,864			25,225,317			(8,381,850		)	138,473,331
Gross profit		45,671,019			7,703,842			—			53,374,861
Operating expenses:
Selling, general and administrative		41,710,397			5,674,250			—			47,384,647
Restructuring charges		568,808			—			—			568,808
Amortization of intangibles		2,408,483			116,376			—			2,524,859
Operating income		983,331			1,913,216			—			2,896,547
Other expense (income):
Interest expense		9,850,981			208,627			—			10,059,608
Interest and other income, net		(191,023		)	—			—			(191,023		)
Income (loss) before benefit for income taxes		(8,676,627		)	1,704,589			—			(6,972,038		)
Benefit for income taxes		(863,513		)	(770,293		)	—			(1,633,806		)
Net income (loss)		$	(7,813,114	)	$	2,474,882		—			$	(5,338,232	)

 

61

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2001

 

		Henry Company (Parent Corporation) and Guarantor Subsidiary			Nonguarantor Subsidiaries			Consolidated Elimination Entries		Consolidated Total
Net cash provided by operating activities		$	1,921,652		$	4,585,526		—		$	6,507,178
Cash flows from investing activities:
Capital expenditures		(1,104,091		)	(253,915		)	—		(1,358,006		)
Proceeds from the disposal of property and equipment		29,073			3,228			—		32,301
Net cash used in investing  activities		(1,075,018		)	(250,687		)	—		(1,325,705		)
Cash flows from financing activities:
Net borrowings under line-of-credit agreements		(3,814,543		)	(3,511,032		)	—		(7,325,575		)
Repayments under notes payable agreements		(97,580		)	—			—		(97,580		)
Borrowings under notes payable agreements		3,500,000			—			—		3,500,000
Decrease in book overdraft		(2,777,690		)	(348,731		)	—		(3,126,421		)
Cash surrender value life insurance		1,489,417			—			—		1,489,417
Purchase of Series B Senior Notes		(150,000		)	—			—		(150,000		)
Net cash used in financing activities		(1,850,396		)	(3,859,763		)	—		(5,710,159		)
Effect of changes in exchange rate on cash and cash equivalents		—			(91,734		)	—		(91,734		)
Net increase (decrease) in cash and cash equivalents		(1,003,762		)	383,342			—		(620,420		)
Cash and cash equivalents, beginning of year		1,044,276			1,839			—		1,046,115
Cash and cash equivalents, end of  year		$	40,514		$	385,181		—		$	425,695

 

62

 

CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2000

 

		Henry Company (Parent Corporation) and Guarantor Subsidiary			Nonguarantor Subsidiaries			Consolidated Elimination Entries			Consolidated Total
Net sales		$	167,907,454		$	32,821,736		$	(9,215,960	)	$	191,513,230
Cost of sales		126,184,981			26,297,135			(9,215,960		)	143,266,156
Gross profit		41,722,473			6,524,601			—			48,247,074
Operating expenses:
Selling, general and administrative		39,008,174			7,586,654			—			46,594,828
Restructuring charges		735,127			—			—			735,127
Amortization of intangibles		2,427,624			122,181			—			2,549,805
Operating loss		(448,452		)	(1,184,234		)	—			(1,632,686		)
Other expense (income):
Interest expense		9,574,463			314,862			—			9,889,325
Interest and other income, net		(260,524		)	—			—			(260,524		)
Loss before income taxes		(9,762,391		)	(1,499,096		)	—			(11,261,487		)
Provision (benefit) for income taxes		(5,025,922		)	430,009			—			(4,595,913		)
Net loss		$	(4,736,469	)	$	(1,929,105	)	—			$	(6,665,574	)

 

63

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2000

 

		Henry Company (Parent Corporation) and Guarantor Subsidiary			Nonguarantor Subsidiaries			Consolidated Elimination Entries			Consolidated Total
Net cash used in operating activities		$	(9,459,343	)	$	(654,718	)	$	—		$	(10,114,061	)
Cash flows from investing activities:
Capital expenditures		(2,365,940		)	(686,510		)	—			(3,052,450		)
Proceeds from the disposal of property and equipment		40,217			—			—			40,217
Proceeds from sale of investment		204,423			—			—			204,423
Investment in affiliate		7,080			—			—			7,080
Net cash used in investing activities		(2,114,220		)	(686,510		)	—			(2,800,730		)
Cash flows from financing activities:
Net borrowings under line-of-credit agreements		9,680,790			1,143,467			—			10,824,257
Repayments under notes payable agreements		(70,641		)	(54,353		)	—			(124,994		)
Increase in book overdrafts		3,071,548			330,605			—			3,402,153
Cash surrender value of life insurance		(746,996		)	—			—			(746,996		)
Net cash provided by financing activities		11,934,701			1,419,719			—			13,354,420
Effect of changes in exchange rate on cash		—			(78,558		)	—			(78,558		)
Net increase (decrease) in cash and cash equivalents		361,138			(67		)	—			361,071
Cash and cash equivalents, beginning of year		683,138			1,906			—			685,044
Cash and cash equivalents, end of year		$	1,044,276		$	1,839		—			$	1,046,115

 

The accompanying notes are an integral part of these consolidated financial statements.

 

64

 

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

 

(In thousands)

 

		Balance at Beginning of Year			Provision			Deductions From Reserves			Balance at End of Year
2002
Allowance for doubtful accounts		$	2,760.6		$	704.5		$	(1,134.9	)	$	2,330.2
Inventory reserve		$	250.0		$	158.0		$	(158.0	)	$	250.0
2001
Allowance for doubtful accounts		$	2,044.2		$	2,050.6		$	(1,334.2	)	$	2,760.6
Inventory reserve		$	—		$	1,217.7		$	(967.7	)	$	250.0
2000
Allowance for doubtful accounts		$	1,027.8		$	1,555.9		$	(539.5	)	$	2,044.2
Inventory reserve		$	—		$	51.6		$	(51.6	)	$	—

 

65

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

		HENRY COMPANY
		(Registrant)
		Warner W. Henry
	By	Chairman of the Board and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Name		Title		Date
William H. Baribault		President, Chief Operating Officer and Director		March 31, 2003
Jeffrey A. Wahba		Chief Financial Officer, Secretary and Director		March 31, 2003
Gary T. Spence		Corporate Controller		March 31, 2003
Joseph T. Mooney Jr.		Director		March 31, 2003
Paul H. Beemer		Director		March 31, 2003
Frederick H. Muhs		Director		March 31, 2003
Carol F. Henry		Director		March 31, 2003
Terrill M. Gloege		Director		March 31, 2003

 

66

 

STATEMENT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 BY CHIEF EXECUTIVE OFFICER REGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS

 

I, Warner Henry, certify that:

 

1.             I have reviewed this annual report on Form 10-K of Henry Company;

 

2.                                       Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4.                                       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

(a)     designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

(b)     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

(c)     presented in this annual report our conclusions about the effectiveness of the disclosure controls  and procedures based on our evaluation as of the Evaluation Date.

 

5.                                       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

(a)     all significant deficiencies in the design or operation of internal controls which could adversely  affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

(b)     any fraud, whether or not material, that involves management or other employees who have a  significant role in the registrant’s internal controls.

 

6.                                       The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect in internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

/s/  Warner Henry
Warner Henry
Chief Executive Officer
March 31, 2003

 

67

 

STATEMENT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 BY CHIEF FINANCIAL OFFICER REGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS

 

I, Jeffrey Wahba, certify that:

 

1.             I have reviewed this annual report on Form 10-K of Henry Company;

 

2.                                       Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4.                                       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

(a)     designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

(b)     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

(c)     presented in this annual report our conclusions about the effectiveness of the disclosure controls  and procedures based on our evaluation as of the Evaluation Date.

 

5.                                       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

(a)     all significant deficiencies in the design or operation of internal controls which could adversely  affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

(b)     any fraud, whether or not material, that involves management or other employees who have a  significant role in the registrant’s internal controls.

 

6.                                       The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect in internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

/s/  Jeffrey A. Wahba
Jeffrey A. Wahba
Chief Financial Officer
March 31, 2003

 

68

 

HENRY COMPANY

INDEX TO EXHIBITS

 

Exhibit Number		Description
3.1*		Certificate of Amendment and Restatement of Articles of Incorporation of Henry Company
3.2*		Bylaws of Henry Company
4.1*		Indenture dated as of April 22, 1998 between the Company, each of the guarantors named therein and U.S. Trust Company of California, N.A., as Trustee, including forms of Senior Notes
4.2*		Registration Rights Agreement dated as of April 22, 1998 by and among the Company, each of the Guarantors named therein and BT Alex.Brown Incorporated as Initial Purchaser
10.1**		Amended Credit Facility dated August 2001.
10.2*		Administrative Services Agreement, dated as of January 1, 1998, between Henry Company and Central Coast Wine Company dba The Henry Wine Group
10.3*		Lease, dated September 5, 1996, between Warner Wheeler Henry Living Trust and Henry Family Trust B and Henry Company
10.3*		Ground Lease, dated September 5, 1996, between Warner Wheeler Henry Living Trust and Henry Family Trust B and Henry Company
10.4*		Ground Lease, dated April 30, 1976, (as extended on December 11, 1996) between The Warner W. Henry Family Trust, the Declaration of Trust for Dorothy H. Floyd and The W.W. Henry Company.
10.5*		Machinery Lease, dated August 1, 1958 and Amendment to Machinery Lease, dated August 1, 1968, between Warner White Henry and The W.W. Henry Company
10.6*		Lease, dated February 27, 1992, between Alamo Development Company and Henry Company
10.7*		Lease Agreement and Addendum to Lease Agreement dated December 23, 1994, by and between Seaboard Supply Co. and Monsey Products Co.
10.8*		Warrant Agreement between Henry Company and the Warner W. Henry Living Trust dated as of October 1, 1997
10.9*		Convertible Preferred Stock Purchase Agreement between Henry Company and Joseph T. Mooney, Jr. dated as of April 22, 1998
10.10*		Stock Purchase Agreement between Henry Company and Frederick Muhs dated as of April 22, 1998
10.11*		Henry Company Executive Deferral Plan
10.12†		Employment agreement between Henry Company and William H. Baribault, dated August 10, 2001
10.13†		Amended and Restated Employment agreement between Henry Company and James F. Doose, dated August 31, 1988
10.14†		Employment agreement between Henry Company and James Van Pelt, dated March 26, 1999
10.15†		Noncompetition agreement between Henry Company and James Van Pelt, dated March 26, 1999
10.16		Revised Incentive Compensation agreement between Henry Company and Jeffrey A. Wahba, dated December 9, 2002
21.1†		Subsidiaries of the Registrant

 

*		Incorporated by reference from Registrant’s Statement of Form S–4, filed September 11, 1998 (Registration No. 333–59485).
**		Incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 2000.
†		Incorporated by reference from Registrant’s Form 10-K for the fiscal year ended December 31, 2001.

 

69